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For Avi 7 again 

change is a change in the topic. 
Cesar Aira, Argentine novelist, 
Cumpleanos, 2001 



Blank Is Beautiful: Three Decades of Erasing and Remaking 
the World 3 


Two Doctor Shocks: Research and Development 

1. The Torture Lab: Ewen Cameron, the CIA and the Maniacal Quest to 
Erase and Remake the Human Mind 25 

2. The Other Doctor Shock: Milton Friedman and the Search for a 
Laissez-Faire Laboratory 49 


The First Test: Birth Pangs 

3. States of Shock: The Bloody Birth of the Counterrevolution 75 

4. Cleaning the Slate: Terror Does Its Work 98 

5. "Entirely Unrelated": How an Ideology Was Cleansed of 
Its Crimes 116 

part 3 

Surviving Democracy: Bombs Made of Laws 

6. Saved by a War: Thatcherism and Its Useful Enemies 131 

7. The New Doctor Shock: Economic Warfare Replaces Dictatorship 142 

8. Crisis Works: The Packaging of Shock Therapy 155 

part 4 

Lost in Transition: While We Wept, While We Trembled, 
While We Danced 

9. Slamming the Door on History: A Crisis in Poland, a 
Massacre in China 171 

10. Democracy Born in Chains: South Africa's Constricted 
Freedom 194 

11. Bonfire of a Young Democracy: Russia Chooses "The Pinochet 
Option" 218 

12. The Capitalist Id: Russia and the New Era of the Boor Market 246 

13. Let It Burn: The Looting of Asia and "The Fall of a Second Berlin 
Wall" 263 


Shocking Times: The Rise of the Disaster Capitalism Complex 

14. Shock Therapy in the U.S.A.: The Homeland Security Bubble 283 

15. A Corporatist State: Removing the Revolving Door, Putting in an 
Archway 308 

part 6 

Iraq, Full Circle: Overshock 

16. Erasing Iraq: In Search of a "Model" for the Middle East 325 

17. Ideological Blowback: A Very Capitalist Disaster 341 

18. Full Circle: From Blank Slate to Scorched Earth 360 


The Movable Green Zone: Buffer Zones and Blast Walls 

19. Blanking the Beach: "The Second Tsunami" 385 

20. Disaster Apartheid: A World of Green Zones and Red Zones 406 

21. Losing the Peace Incentive: Israel as Warning 423 


Shock Wears Off: The Rise of People's Reconstruction 
Notes 467 

Acknowledgments 527 
Index 535 





Now the earth was corrupt in God's sight, and the earth was filled 
with violence. And God saw that the earth was corrupt; for all 
flesh had corrupted its ways upon the earth. And God said to Noah, 
"I have determined to make an end of all flesh, for the earth is 
filled with violence because of them; now I am going to destroy 
them along with the earth." 
-Genesis 6:11 (NRSV) 

Shock and Awe are actions that create fears, dangers, and de- 
struction that are incomprehensible to the people at large, spe- 
cific elements/sectors of the threat society, or the leadership. 
Nature in the form of tornadoes, hurricanes, earthquakes, floods, 
uncontrolled fires, famine, and disease can engender Shock and 

—Shock and Awe: Achieving Rapid Dominance, the military doctrine 
for the U.S. war on Iraq 1 

I met Jamar Perry in September 2005, at the big Red Cross shelter in Baton 
Rouge, Louisiana. Dinner was being doled out by grinning young Scientol- 
ogists, and he was standing in line. I had just been busted for talking to evac- 
uees without a media escort and was now doing my best to blend in, a white 
Canadian in a sea of African-American Southerners. I dodged into the food 
line behind Perry and asked him to talk to me as if we were old friends, 
which he kindly did. 


Born and raised in New Orleans, he'd been out of the flooded city for a 
week. He looked about seventeen but told me he was twenty-three. He and 
his family had waited forever for the evacuation buses; when they didn't ar- 
rive, they had walked out in the baking sun. Finally they ended up here, a 
sprawling convention center, normally home to pharmaceutical trade shows 
and "Capital City Carnage: The Ultimate in Steel Cage Fighting," now 
jammed with two thousand cots and a mess of angry, exhausted people be- 
ing patrolled by edgy National Guard soldiers just back from Iraq. 

The news racing around the shelter that day was that Richard Baker, a 
prominent Republican congressman from this city, had told a group of lob- 
byists, "We finally cleaned up public housing in New Orleans. We couldn't 
do it, but God did." 2 Joseph Canizaro, one of New Orleans' wealthiest devel- 
opers, had just expressed a similar sentiment: "I think we have a clean sheet 
to start again. And with that clean sheet we have some very big opportuni- 
ties." 5 All that week the Louisiana State Legislature in Baton Rouge had 
been crawling with corporate lobbyists helping to lock in those big opportu- 
nities: lower taxes, fewer regulations, cheaper workers and a "smaller, safer 
city" — which in practice meant plans to level the public housing projects 
and replace them with condos. Hearing all the talk of "fresh starts" and 
"clean sheets," you could almost forget the toxic stew of rubble, chemical 
outflows and human remains just a few miles down the highway. 

Over at the shelter, Jamar could think of nothing else. "I really don't see it 
as cleaning up the city. What I see is that a lot of people got killed uptown. 
People who shouldn't have died." 

He was speaking quietly, but an older man in line in front of us overheard 
and whipped around. "What is wrong with these people in Baton Rouge? 
This isn't an opportunity. It's a goddamned tragedy. Are they blind?" 

A mother with two kids chimed in. "No, they're not blind, they're evil. 
They see just fine." 

One of those who saw opportunity in the floodwaters of New Orleans was 
Milton Friedman, grand guru of the movement for unfettered capitalism 
and the man credited with writing the rulebook for the contemporary, hy- 
permobile global economy. Ninety-three years old and in failing health, 
"Uncle Miltie," as he was known to his followers, nonetheless found the 
strength to write an op-ed for The Wall Street Journal three months after the 
levees broke. "Most New Orleans schools are in ruins," Friedman observed, 
"as are the homes of the children who have attended them. The children are 


now scattered all over the country. This is a tragedy. It is also an opportunity 
to radically reform the educational system." 4 

Friedman's radical idea was that instead of spending a portion of the bil- 
lions of dollars in reconstruction money on rebuilding and improving New 
Orleans' existing public school system, the government should provide fam- 
ilies with vouchers, which they could spend at private institutions, many run 
at a profit, that would be subsidized by the state. It was crucial, Friedman 
wrote, that this fundamental change not be a stopgap but rather "a perma- 
nent reform." 5 

A network of right-wing think tanks seized on Friedman's proposal and 
descended on the city after the storm. The administration of George W. 
Bush backed up their plans with tens of millions of dollars to convert New 
Orleans schools into "charter schools " publicly funded institutions run by 
private entities according to their own rules. Charter schools are deeply po- 
larizing in the United States, and nowhere more than in New Orleans, 
where they are seen by many African-American parents as a way of reversing 
the gains of the civil rights movement, which guaranteed all children the 
same standard of education. For Milton Friedman, however, the entire con- 
cept of a state-run school system reeked of socialism. In his view, the state's 
sole functions were "to protect our freedom both from the enemies outside 
our gates and from our fellow-citizens: to preserve law and order, to enforce 
private contracts, to foster competitive markets." 6 In other words, to supply 
the police and the soldiers— anything else, including providing free educa- 
tion, was an unfair interference in the market. 

In sharp contrast to the glacial pace with which the levees were repaired 
and the electricity grid was brought back online, the auctioning off of New 
Orleans' school system took place with military speed and precision. Within 
nineteen months, with most of the city's poor residents still in exile, New Or- 
leans' public school system had been almost completely replaced by pri- 
vately run charter schools. Before Hurricane Katrina, the school board had 
run 123 public schools; now it ran just 4. Before that storm, there had been 
7 charter schools in the city; now there were 31. 7 New Orleans teachers used 
to be represented by a strong union; now the union's contract had been 
shredded, and its forty-seven hundred members had all been fired. 8 Some of 
the younger teachers were rehired by the charters, at reduced salaries; most 
were not. 

New Orleans was now, according to The New York Times, "the nation's 
preeminent laboratory for the widespread use of charter schools," while the 


American Enterprise Institute, a Friedmanite think tank, enthused that "Ka- 
trina accomplished in a day . . . what Louisiana school reformers couldn't do 
after years of trying." 9 Public school teachers, meanwhile, watching money 
allocated for the victims of the flood being diverted to erase a public system 
and replace it with a private one, were calling Friedman's plan "an educa- 
tional land grab." 10 

I call these orchestrated raids on the public sphere in the wake of cata- 
strophic events, combined with the treatment of disasters as exciting market 
opportunities, "disaster capitalism." 

Friedman's New Orleans op-ed ended up being his last public policy recom- 
mendation; he died less than a year later, on November 16, 2006, at age 
ninety-four. Privatizing the school system of a midsize American city may 
seem like a modest preoccupation for the man hailed as the most influential 
economist of the past half century, one who counted among his disciples 
several U.S. presidents, British prime ministers, Russian oligarchs, Polish fi- 
nance ministers, Third World dictators, Chinese Communist Party secre- 
taries, International Monetary Fund directors and the past three chiefs of the 
U.S. Federal Reserve. Yet his determination to exploit the crisis in New Or- 
leans to advance a fundamentalist version of capitalism was also an oddly fit- 
ting farewell from the boundlessly energetic five-foot-two-inch professor 
who, in his prime, described himself as "an old-fashioned preacher deliver- 
ing a Sunday sermon." 11 

For more than three decades, Friedman and his powerful followers had 
been perfecting this very strategy: waiting for a major crisis, then selling off 
pieces of the state to private players while citizens were still reeling from the 
shock, then quickly making the "reforms" permanent. 

In one of his most influential essays, Friedman articulated contemporary 
capitalism's core tactical nostrum, what I have come to understand as the 
shock doctrine. He observed that "only a crisis— actual or perceived— produces 
real change. When that qrisis occurs, the actions that are taken depend on the 
ideas that are lying around. That, I believe, is our basic function: to develop al- 
ternatives to existing policies, to keep them alive and available until the politi- 
cally impossible becomes politically inevitable." 12 Some people stockpile 
canned goods and water in preparation for major disasters; Friedmanites stock- 
pile free-market ideas. And once a crisis has struck, the University of Chicago 
professor was convinced that it was crucial to act swiftly, to impose rapid and 
irreversible change before the crisis-racked society slipped back into the 


"tyranny of the status quo." He estimated that "a new administration has 
some six to nine months in which to achieve major changes; if it does not 
seize the opportunity to act decisively during that period, it will not have an- 
other such opportunity." 13 A variation on Machiavelli's advice that injuries 
should be inflicted "all at once," this proved to be one of Friedman's most 
lasting strategic legacies. 

Friedman first learned how to exploit a large-scale shock or crisis in the mid- 
seventies, when he acted as adviser to the Chilean dictator, General Augusto 
Pinochet. Not only were Chileans in a state of shock following Pinochet's vi- 
olent coup, but the country was also traumatized by severe hyperinflation. 
Friedman advised Pinochet to impose a rapid-fire transformation of the 
economy— tax cuts, free trade, privatized services, cuts to social spending and 
deregulation. Eventually, Chileans even saw their public schools replaced 
with voucher-funded private ones. It was the most extreme capitalist make- 
over ever attempted anywhere, and it became known as a "Chicago School" 
revolution, since so many of Pinochet's economists had studied under Fried- 
man at the University of Chicago. Friedman predicted that the speed, sud- 
denness and scope of the economic shifts would provoke psychological 
reactions in the public that "facilitate the adjustment." 14 He coined a phrase 
for this painful tactic: economic "shock treatment." In the decades since, 
whenever governments have imposed sweeping free-market programs, the all- 
at-once shock treatment, or "shock therapy," has been the method of choice. 

Pinochet also facilitated the adjustment with his own shock treatments; 
these were performed in the regime's many torture cells, inflicted on the 
writhing bodies of those deemed most likely to stand in the way of the capi- 
talist transformation. Many in Latin America saw a direct connection be- 
tween the economic shocks that impoverished millions and the epidemic of 
torture that punished hundreds of thousands of people who believed in a dif- 
ferent kind of society. As the Uruguayan writer Eduardo Galeano asked, 
"How can this inequality be maintained if not through jolts of electric 
shock?" 15 

Exactly thirty years after these three distinct forms of shock descended on 
Chile, the formula reemerged, with far greater violence, in Iraq. First came 
the war, designed, according to the authors of the Shock and Awe military 
doctrine, to "control the adversary's will, perceptions, and understanding 
and literally make an adversary impotent to act or react." 16 Next came the 
radical economic shock therapy, imposed, while the country was still in 


flames, by the U.S. chief envoy L. Paul Bremer— mass privatization, com- 
plete free trade, a 1 5 percent flat tax, a dramatically downsized government. 
Iraq's interim trade minister, Ali Abdul-Amir Allawi, said at the time that his 
countrymen were "sick and tired of being the subjects of experiments. There 
have been enough shocks to the system, so we don't need this shock therapy 
in the economy." 1 ' When Iraqis resisted, they were rounded up and taken to 
jails where bodies and minds were met with more shocks, these ones dis- 
tinctly less metaphorical. 

I started researching the free market's dependence on the power of shock 
four years ago, during the early days of the occupation of Iraq. After report- 
ing from Baghdad on Washington's failed attempts to follow Shock and Awe 
with shock therapy, I traveled to Sri Lanka, several months after the devas- 
tating 2004 tsunami, and witnessed another version of the same maneuver: 
foreign investors and international lenders had teamed up to use the atmos- 
phere of panic to hand the entire beautiful coastline over to entrepreneurs 
who quickly built large resorts, blocking hundreds of thousands of fishing 
people from rebuilding their villages near the water. "In a cruel twist of fate, 
nature has presented Sri Lanka with a unique opportunity, and out of this 
great tragedy will come a world class tourism destination," the Sri Lankan 
government announced. 18 By the time Hurricane Katrina hit New Orleans, 
and the nexus of Republican politicians, think tanks and land developers 
started talking about "clean sheets" and exciting opportunities, it was clear 
that this was now the preferred method of advancing corporate goals: using 
moments of collective trauma to engage in radical social and economic en- 

Most people who survive a devastating disaster want the opposite of a 
clean slate: they want to salvage whatever they can and begin repairing what 
was not destroyed; they want to reaffirm their relatedness to the places that 
formed them. "When I rebuild the city I feel like I'm rebuilding myself," said 
Cassandra Andrews, a resident of New Orleans' heavily damaged Lower 
Ninth Ward, as she cleared away debris after the storm. 19 But disaster capital- 
ists have no interest in repairing what was. In Iraq, Sri Lanka and New Or- 
leans, the process deceptively called "reconstruction" began with finishing 
the job of the original disaster by erasing what was left of the public sphere 
and rooted communities, then quickly moving to replace them with a kind 
of corporate New Jerusalem — all before the victims of war or natural disaster 
were able to regroup and stake their claims to what was theirs. 


Mike Battles puts it best: "For us, the fear and disorder offered real prom- 
ise." 20 The thirty-four-year-old ex-CIA operative was talking about how the 
chaos in postinvasion Iraq had helped his unknown and inexperienced pri- 
vate security firm, Custer Battles, to shake roughly $100 million in contracts 
out of the federal government. 21 His words could serve just as well as the slo- 
gan for contemporary capitalism— fear and disorder are the catalysts for 
each new leap forward. 

When I began this research into the intersection between superprofits 
and megadisasters, I thought I was witnessing a fundamental change in the 
way the drive to "liberate" markets was advancing around the world. Having 
been part of the movement against ballooning corporate power that made its 
global debut in Seattle in 1999, 1 was accustomed to seeing similar business- 
friendly policies imposed through arm-twisting at World Trade Organization 
summits, or as the conditions attached to loans from the International Mon- 
etary Fund. The three trademark demands— privatization, government 
deregulation and deep cuts to social spending— tended to be extremely 
unpopular with citizens, but when the agreements were signed there was 
still at least the pretext of mutual consent between the governments doing 
the negotiating, as well as a consensus among the supposed experts. Now the 
same ideological program was being imposed via the most baldly coercive 
means possible: under foreign military occupation after an invasion, or im- 
mediately following a cataclysmic natural disaster. September 1 1 appeared 
to have provided Washington with the green light to stop asking countries if 
they wanted the U.S. version of "free trade and democracy" and to start im- 
posing it with Shock and Awe military force. 

As I dug deeper into the history of how this market model had swept the 
globe, however, I discovered that the idea of exploiting crisis and disaster has 
been the modus operandi of Milton Friedman's movement from the very 
beginning— this fundamentalist form of capitalism has always needed disas- 
ters to advance. It was certainly the case that the facilitating disasters were 
getting bigger and more shocking, but what was happening in Iraq and New 
Orleans was not a new, post-September 1 1 invention. Rather, these bold ex- 
periments in crisis exploitation were the culmination of three decades of 
strict adherence to the shock doctrine. 

Seen through the lens of this doctrine, the past thirty-five years look very 
different. Some of the most infamous human rights violations of this era, 
which have tended to be viewed as sadistic acts carried out by antidemo- 
cratic regimes, were in fact either committed with the deliberate intent of 


terrorizing the public or actively harnessed to prepare the ground for the 
introduction of radical free-market "reforms." In Argentina in the seventies, 
the junta's "disappearance" of thirty thousand people, most of them leftist 
activists, was integral to the imposition of the country's Chicago School poli- 
cies, just as terror had been a partner for the same kind of economic meta- 
morphosis in Chile. In China in 1989, it was the shock of the Tiananmen 
Square massacre and the subsequent arrests of tens of thousands that freed 
the hand of the Communist Party to convert much of the country into a 
sprawling export zone, staffed with workers too terrified to demand their 
rights. In Russia in 1993, it was Boris Yeltsin's decision to send in tanks to set 
fire to the parliament building and lock up the opposition leaders that 
cleared the way for the fire-sale privatization that created the country's noto- 
rious oligarchs. 

The Falklands War in 1982 served a similar purpose for Margaret Thatcher 
in the U.K.: the disorder and nationalist excitement resulting from the war al- 
lowed her to use tremendous force to crush the striking coal miners and to 
launch the first privatization frenzy in a Western democracy. The NATO at- 
tack on Belgrade in 1999 created the conditions for rapid privatizations in the 
former Yugoslavia— a goal that predated the war. Economics was by no 
means the sole motivator for these wars, but in each case a major collective 
shock was exploited to prepare the ground for economic shock therapy. 

The traumatic episodes that have served this "softening-up" purpose have 
not always been overtly violent. In Latin America and Africa in the eighties, 
it was a debt crisis that forced countries to be "privatized or die," as one for- 
mer IMF official put it. 22 Coming unraveled by hyperinflation and too in- 
debted to say no to demands that came bundled with foreign loans, 
governments accepted "shock treatment" on the promise that it would save 
them from deeper disaster. In Asia, it was the financial crisis of 1997-98 — 
almost as devastating as the Great Depression— that humbled the so-called 
Asian Tigers, cracking open their markets to what The New York Times de- 
scribed as "the world's biggest going-out-of-business sale." 23 Many of these 
countries were democracies, but the radical free-market transformations 
were not imposed democratically. Quite the opposite: as Friedman under- 
stood, the atmosphere of large-scale crisis provided the necessary pretext to 
overrule the expressed wishes of voters and to hand the country over to eco- 
nomic "technocrats." 

There have, of course, been cases in which the adoption of free-market 
policies has taken place democratically— politicians have run on hard-line 


platforms and won elections, the U.S. under Ronald Reagan being the best 
example, France's election of Nicolas Sarkozy a more recent one. In these 
cases, however, free-market crusaders came up against public pressure and 
were invariably forced to temper and modify their radical plans, accepting 
piecemeal changes rather than a total conversion. The bottom line is that 
while Friedman's economic model is capable of being partially imposed un- 
der democracy, authoritarian conditions are required for the implementa- 
tion of its true vision. For economic shock therapy to be applied without 
restraint— as it was in Chile in the seventies, China in the late eighties, Rus- 
sia in the nineties and the U.S. after September 11, 2001 —some sort of ad- 
ditional major collective trauma has always been required, one that either 
temporarily suspended democratic practices or blocked them entirely. This 
ideological crusade was born in the authoritarian regimes of South America, 
and in its largest newly conquered territories — Russia and China — it coex- 
ists most comfortably, and most profitably, with an iron-fisted leadership to 
this day. 

Shock Therapy Comes Home 

Friedman's Chicago School movement has been conquering territory 
around the world since the seventies, but until recently its vision had never 
been fully applied in its country of origin. Certainly Reagan had made head- 
way, but the U.S. retained a welfare system, social security and public 
schools, where parents clung, in Friedman's words, to their "irrational at- 
tachment to a socialist system." 24 

When the Republicans gained control of Congress in 1995, David Frum, 
a transplanted Canadian and future speechwriter for George W. Bush, was 
among the so-called neoconservatives calling for a shock therapy-style eco- 
nomic revolution in the U.S. "Here's how I think we should do it. Instead of 
cutting incrementally— a little here, a little there — I would say that on a sin- 
gle day this summer we eliminate three hundred programs, each one costing 
a billion dollars or less. Maybe these cuts won't make a big deal of differ- 
ence, but, boy, do they make a point. And you can do them right away." 25 

Frum didn't get his homegrown shock therapy at the time, largely because 
there was no domestic crisis to prepare the ground. But in 2001 that 
changed. When the September 1 1 attacks hit, the White House was packed 
with Friedman's disciples, including his close friend Donald Rumsfeld. The 
Bush team seized the moment of collective vertigo with chilling speed— not, 


as some have claimed, because the administration deviously plotted the cri- 
sis but because the key figures of the administration, veterans of earlier disas- 
ter capitalism experiments in Latin America and Eastern Europe, were part 
of a movement that prays for crisis the way drought-struck farmers pray for 
rain, and the way Christian-Zionist end-timers pray for the Rapture. When 
the long-awaited disaster strikes, they know instantly that their moment has 
come at last. 

For three decades, Friedman and his followers had methodically exploited 
moments of shock in other countries— foreign equivalents of 9/11, starting 
with Pinochet's coup on September 11, 1973. What happened on September 
11, 2001, is that an ideology hatched in American universities and fortified in 
Washington institutions finally had its chance to come home. 

The Bush administration immediately seized upon the fear generated by 
the attacks not only to launch the "War on Terror" but to ensure that it is an 
almost completely for-profit venture, a booming new industry that has 
breathed new life into the faltering U.S. economy. Best understood as a "dis- 
aster capitalism complex," it has much farther-reaching tentacles than the 
military-industrial complex that Dwight Eisenhower warned against at the 
end of his presidency: this is global war fought on every level by private com- 
panies whose involvement is paid for with public money, with the unending 
mandate of protecting the United States homeland in perpetuity while elim- 
inating all "evil" abroad. In only a few short years, the complex has already 
expanded its market reach from fighting terrorism to international peace- 
keeping, to municipal policing, to responding to increasingly frequent natu- 
ral disasters. The ultimate goal for the corporations at the center of the complex 
is to bring the model of for-profit government, which advances so rapidly in 
extraordinary circumstances, into the ordinary and day-to-day functioning of 
the state — in effect, to privatize the government. 

To kick-start the disaster capitalism complex, the Bush administration out- 
sourced, with no public debate, many of the most sensitive and core func- 
tions of government— from providing health care to soldiers, to interrogating 
prisoners, to gathering and "data mining" information on all of us. The role 
of the government in this unending war is not that of an administrator man- 
aging a network of contractors but of a deep-pocketed venture capitalist, both 
providing its seed money for the complex's creation and becoming the biggest 
customer for its new services. To cite just three statistics that show the scope 
of the transformation, in 2003, the U.S. government handed out 3,512 con- 
tracts to companies to perform security functions; in the twenty-two-month 


period ending in August 2006, the Department of Homeland Security had 
issued more than 115,000 such contracts. 26 The global "homeland security 
industry" — economically insignificant before 2001— is now a $200 billion 
sector. 27 In 2006, U.S. government spending on homeland security averaged 
$545 per household. 28 

And that's just the home front of the War on Terror; the real money is in 
fighting wars abroad. Beyond the weapons contractors, who have seen their 
profits soar thanks to the war in Iraq, maintaining the U.S. military is now 
one of the fastest-growing service economies in the world. 29 "No two coun- 
tries that both have a McDonald's have ever fought a war against each other," 
boldly declared the New York Times columnist Thomas Friedman in De- 
cember 1996. 30 Not only was he proven wrong two years later, but thanks to 
the model of for-profit warfare, the U.S. Army goes to war with Burger King 
and Pizza Hut in tow, contracting them to run franchises for the soldiers on 
military bases from Iraq to the "mini city" at Guantanamo Bay. 

Then there is humanitarian relief and reconstruction. Pioneered in 
Iraq, for-profit relief and reconstruction has already become the new 
global paradigm, regardless of whether the original destruction occurred 
from a preemptive war, such as Israel's 2006 attack on Lebanon, or a hur- 
ricane. With resource scarcity and climate change providing a steadily in- 
creasing flow of new disasters, responding to emergencies is simply too hot 
an emerging market to be left to the nonprofits— why should UNICEF re- 
build schools when it can be done by Bechtel, one of the largest engineer- 
ing firms in the U.S.? Why put displaced people from Mississippi in 
subsidized empty apartments when they can be housed on Carnival cruise 
ships? Why deploy UN peacekeepers to Darfur when private security com- 
panies like Blackwater are looking for new clients? And that is the post- 
September 1 1 difference: before, wars and disasters provided opportunities 
for a narrow sector of the economy— the makers of fighter jets, for in- 
stance, or the construction companies that rebuilt bombed-out bridges. 
The primary economic role of wars, however, was as a means to open new 
markets that had been sealed off and to generate postwar peacetime 
booms. Now wars and disaster responses are so fully privatized that they are 
themselves the new market; there is no need to wait until after the war for 
the boom — the medium is the message. 

One distinct advantage of this postmodern approach is that in market 
terms, it cannot fail. As a market analyst remarked of a particularly good 
quarter for the earnings of the energy services company Halliburton, "Iraq 


was better than expected." 31 That was in October 2006, then the most violent 
month of the war on record, with 3,709 Iraqi civilian casualties. 32 Still, few 
shareholders could fail to be impressed by a war that had generated $20 bil- 
lion in revenues for this one company. 53 

Amid the weapons trade, the private soldiers, for-profit reconstruction and 
the homeland security industry, what has emerged as a result of the Bush ad- 
ministration's particular brand of post-September 1 1 shock therapy is a fully 
articulated new economy. It was built in the Bush era, but it now exists quite 
apart from any one administration and will remain entrenched until the cor- 
porate supremacist ideology that underpins it is identified, isolated and chal- 
lenged. The complex is dominated by U.S. firms, but it is global, with British 
companies bringing their experience in ubiquitous security cameras, Israeli 
firms their expertise in building high-tech fences and walls, the Canadian 
lumber industry selling prefab houses that are several times more expensive 
than those produced locally, and so on. "I don't think anybody has looked at 
disaster reconstruction as an actual housing market before," said Ken Baker, 
CEO of a Canadian forestry trade group. "It's a strategy to diversify in the 
long run." 34 

In scale, the disaster capitalism complex is on a par with the "emerging 
market" and information technology booms of the nineties. In fact, insiders 
say that the deals are even better than during the dot-com days and that "the 
security bubble" picked up the slack when those earlier bubbles popped. 
Combined with soaring insurance industry profits (projected to have reached 
a record $60 billion in 2006 in the U.S. alone) as well as super profits for the 
oil industry (which grow with each new crisis), the disaster economy may 
well have saved the world market from the full-blown recession it was facing 
on the eve of 9/1 1. 3 5 

In the attempt to relate the history of the ideological crusade that has culmi- 
nated in the radical privatization of war and disaster, one problem recurs: the 
ideology is a shape-shifter, forever changing its name and switching identities. 
Friedman called himself a "liberal," but his U.S. followers, who associated lib- 
erals with high taxes and hippies, tended to identify as "conservatives," "clas- 
sical economists," "free marketers," and, later, as believers in "Reaganomics" 
or "laissez-faire." In most of the world, their orthodoxy is known as "neoliber- 
alism," but it is often called "free trade" or simply "globalization." Only since 
the mid-nineties has the intellectual movement, led by the right-wing think 
tanks with which Friedman had long associations — Heritage Foundation, 


Cato Institute and the American Enterprise Institute— called itself "neocon- 
servative," a worldview that has harnessed the full force of the U.S. military 
machine in the service of a corporate agenda. 

All these incarnations share a commitment to the policy trinity— the elim- 
ination of the public sphere, total liberation for corporations and skeletal so- 
cial spending— but none of the various names for the ideology seem quite 
adequate. Friedman framed his movement as an attempt to free the market 
from the state, but the real-world track record of what happens when his 
purist vision is realized is rather different. In every country where Chicago 
School policies have been applied over the past three decades, what has 
emerged is a powerful ruling alliance between a few very large corporations 
and a class of mostly wealthy politicians— with hazy and ever-shifting lines 
between the two groups. In Russia the billionaire private players in the al- 
liance are called "the oligarchs"; in China, "the princelings"; in Chile, "the 
piranhas"; in the U.S., the Bush-Cheney campaign "Pioneers." Far from free- 
ing the market from the state, these political and corporate elites have simply 
merged, trading favors to secure the right to appropriate precious resources 
previously held in the public domain— from Russia's oil fields, to China's col- 
lective lands, to the no-bid reconstruction contracts for work in Iraq. 

A more accurate term for a system that erases the boundaries between Big 
Government and Big Business is not liberal, conservative or capitalist but cor- 
poratist. Its main characteristics are huge transfers of public wealth to private 
hands, often accompanied by exploding debt, an ever-widening chasm be- 
tween the dazzling rich and the disposable poor and an aggressive national- 
ism that justifies bottomless spending on security. For those inside the bubble 
of extreme wealth created by such an arrangement, there can be no more 
profitable way to organize a society. But because of the obvious drawbacks for 
the vast majority of the population left outside the bubble, other features of 
the corporatist state tend to include aggressive surveillance (once again, with 
government and large corporations trading favors and contracts), mass incar- 
ceration, shrinking civil liberties and often, though not always, torture. 

Torture as Metaphor 

From Chile to China to Iraq, torture has been a silent partner in the global 
free-market crusade. But torture is more than a tool used to enforce unwanted 
policies on rebellious peoples; it is also a metaphor of the shock doctrine's 
underlying logic. 


Torture, or in CIA language "coercive interrogation," is a set of tech- 
niques designed to put prisoners into a state of deep disorientation and shock 
in order to force them to make concessions against their will. The guiding 
logic is elaborated in two CIA manuals that were declassified in the late 
nineties. They explain that the way to break "resistant sources" is to create vi- 
olent ruptures between prisoners and their ability to make sense of the world 
around them. 56 First, the senses are starved of any input (with hoods, 
earplugs, shackles, total isolation), then the body is bombarded with over- 
whelming stimulation (strobe lights, blaring music, beatings, electroshock). 

The goal of this "softening-up" stage is to provoke a kind of hurricane in 
the mind: prisoners are so regressed and afraid that they can no longer think 
rationally or protect their own interests. It is in that state of shock that most 
prisoners give their interrogators whatever they want— information, confes- 
sions, a renunciation of former beliefs. One CIA manual provides a particu- 
larly succinct explanation: "There is an interval — which may be extremely 
brief— of suspended animation, a kind of psychological shock or paralysis. It 
is caused by a traumatic or sub-traumatic experience which explodes, as it 
were, the world that is familiar to the subject as well as his image of himself 
within that world. Experienced interrogators recognize this effect when it ap- 
pears and know that at this moment the source is far more open to suggestion, 
far likelier to comply, than he was just before he experienced the shock." 37 

The shock doctrine mimics this process precisely, attempting to achieve 
on a mass scale what torture does one on one in the interrogation cell. The 
clearest example was the shock of September 11, which, for millions of peo- 
ple, exploded "the world that is familiar" and opened up a period of deep dis- 
orientation and regression that the Bush administration expertly exploited. 
Suddenly we found ourselves living in a kind of Year Zero, in which every- 
thing we knew of the world before could now be dismissed as "pre-9/1 1 
thinking." Never strong in our knowledge of history, North Americans had 
become a blank slate — "a clean sheet of paper" on which "the newest and 
most beautiful words can be written," as Mao said of his people. 38 A new 
army of experts instantly materialized to write new and beautiful words on 
the receptive canvas of our posttrauma consciousness: "clash of civilizations," 
they inscribed. "Axis of evil," "Islamo-fascism," "homeland security." With 
everyone preoccupied by the deadly new culture wars, the Bush administra- 
tion was able to pull off what it could only have dreamed of doing before 
9/11: wage privatized wars abroad and build a corporate security complex at 


That is how the shock doctrine works: the original disaster— the coup, the 
terrorist attack, the market meltdown, the war, the tsunami, the hurricane — 
puts the entire population into a state of collective shock. The falling 
bombs, the bursts of terror, the pounding winds serve to soften up whole so- 
cieties much as the blaring music and blows in the torture cells soften up 
prisoners. Like the terrorized prisoner who gives up the names of comrades 
and renounces his faith, shocked societies often give up things they would 
otherwise fiercely protect. Jamar Perry and his fellow evacuees at the Baton 
Rouge shelter were supposed to give up their housing projects and public 
schools. After the tsunami, the fishing people in Sri Lanka were supposed to 
give up their valuable beachfront land to hoteliers. Iraqis, if all had gone ac- 
cording to plan, were supposed to be so shocked and awed that they would 
give up control of their oil reserves, their state companies and their sover- 
eignty to U.S. military bases and green zones. 

The Big Lie 

In the torrent of words written in eulogy to Milton Friedman, the role of 
shocks and crises to advance his worldview received barely a mention. In- 
stead, the economist's passing provided an occasion for a retelling of the offi- 
cial story of how his brand of radical capitalism became government 
orthodoxy in almost every corner of the globe. It is a fairy-tale version of his- 
tory, scrubbed clean of all the violence and coercion so intimately entwined 
with this crusade, and it represents the single most successful propaganda 
coup of the past three decades. The story goes something like this. 

Friedman devoted his life to fighting a peaceful battle of ideas against 
those who believed that governments had a responsibility to intervene in the 
market to soften its sharp edges. He believed history "got off on the wrong 
track" when politicians began listening to John Maynard Keynes, intellec- 
tual architect of the New Deal and the modern welfare state. 39 The market 
crash of 1929 had created an overwhelming consensus that laissez-faire had 
failed and that governments needed to intervene in the economy to redistrib- 
ute wealth and regulate corporations. During those dark days for laissez-faire, 
when Communism conquered the East, the welfare state was embraced by 
the West and economic nationalism took root in the postcolonial South, 
Friedman and his mentor, Friedrich Hayek, patiently protected the flame of 
a pure version of capitalism, untarnished by Keynesian attempts to pool col- 
lective wealth to build more just societies. 


"The major error, in my opinion," Friedman wrote in a letter to Pinochet 
in 1975, was "to believe that it is possible to do good with other people's 
money." 40 Few listened; most people kept insisting that their governments 
could and should do good. Friedman was dismissively described in Time in 
1969 "as a pixie or a pest," and revered as a prophet by only a select few. 41 

Finally, after he'd spent decades in the intellectual wilderness, came the 
eighties and the rule of Margaret Thatcher (who called Friedman "an intel- 
lectual freedom fighter") and Ronald Reagan (who was seen carrying a copy 
of Capitalism and Freedom, Friedman's manifesto, on the presidential cam- 
paign trail). 42 At last there were political leaders who had the courage to im- 
plement unfettered free markets in the real world. According to this official 
story, after Reagan and Thatcher peacefully and democratically liberated 
their respective markets, the freedom and prosperity that followed were so 
obviously desirable that when dictatorships started falling, from Manila to 
Berlin, the masses demanded Reaganomics alongside their Big Macs. 

When the Soviet Union finally collapsed, the people of the "evil empire" 
were also eager to join the Friedmanite revolution, as were the Communists- 
turned-capitalists in China. That meant that nothing was left to stand in the 
way of a truly global free market, one in which liberated corporations were 
not only free in their own countries but free to travel across borders unhin- 
dered, unleashing prosperity around the world. There was now a twin con- 
sensus about how society should be run: political leaders should be elected, 
and economies should be run according to Friedman's rules. It was, as Fran- 
cis Fukuyama said, "the end of history"— "the end point of mankind's ideo- 
logical evolution." 43 When Friedman died, Fortune magazine wrote that "he 
had the tide of history with him"; a resolution was passed in the U.S. Con- 
gress praising him as "one of the world's foremost champions of liberty, not 
just in economics but in all respects"; the California governor, Arnold 
Schwarzenegger, declared January 29, 2007, to be a statewide Milton Fried- 
man Day, and several cities and towns did the same. A headline in The Wall 
Street Journal encapsulated this tidy narrative: "Freedom Man." 44 

This book is a challenge to the central and most cherished claim in the offi- 
cial story— that the triumph of deregulated capitalism has been born of free- 
dom, that unfettered free markets go hand in hand with democracy. Instead, 
I will show that this fundamentalist form of capitalism has consistently been 
midwifed by the most brutal forms of coercion, inflicted on the collective 
body politic as well as on countless individual bodies. The history of the 


contemporary free market— better understood as the rise of corporatism — 
was written in shocks. 

The stakes are high. The corporatist alliance is in the midst of conquering 
its final frontiers: the closed oil economies of the Arab world, and sectors of 
Western economies that have long been protected from profit making- 
including responding to disasters and raising armies. Since there is not even 
the veneer of seeking public consent to privatize such essential functions, ei- 
ther at home or abroad, escalating levels of violence and ever larger disasters 
are required in order to reach the goal. Yet because the decisive role played 
by shocks and crises has been so effectively purged from the official record of 
the rise of the free market, the extreme tactics on display in Iraq and New 
Orleans are often mistaken for the unique incompetence or cronyism of the 
Bush White House. In fact, Bush's exploits merely represent the monstrously 
violent and creative culmination of a fifty-year campaign for total corporate 

Any attempt to hold ideologies accountable for the crimes committed by 
their followers must be approached with a great deal of caution. It is too easy 
to assert that those with whom we disagree are not just wrong but tyrannical, 
fascist, genocidal. But it is also true that certain ideologies are a danger to the 
public and need to be identified as such. These are the closed, fundamen- 
talist doctrines that cannot coexist with other belief systems; their followers 
deplore diversity and demand an absolute free hand to implement their per- 
fect system. The world as it is must be erased to make way for their purist in- 
vention. Rooted in biblical fantasies of great floods and great fires, it is a logic 
that leads ineluctably toward violence. The ideologies that long for that im- 
possible clean slate, which can be reached only through some kind of cata- 
clysm, are the dangerous ones. 

Usually it is extreme religious and racially based idea systems that demand 
the wiping out of entire peoples and cultures in order to fulfill a purified vision 
of the world. But since the collapse of the Soviet Union, there has been a pow- 
erful collective reckoning with the great crimes committed in the name of 
Communism. The Soviet information vaults have been cracked open to re- 
searchers who have counted the dead — through forced famines, work camps 
and assassinations. The process has sparked heated debate around the world 
about how many of these atrocities stemmed from the ideology invoked, as op- 
posed to its distortion by adherents like Stalin, Ceausescu, Mao and Pol Pot. 

"It was flesh-and-blood Communism that imposed wholesale repression, 
culminating in a state-sponsored reign of terror," writes Stephane Courtois, 


coauthor of the contentious Black Book of Communism. "Is the ideology it- 
self blameless?" 45 Of course it is not. It doesn't follow that all forms of Com- 
munism are inherently genocidal, as some have gleefully claimed, but it was 
certainly an interpretation of Communist theory that was doctrinaire, au- 
thoritarian, and contemptuous of pluralism that led to Stalin's purges and to 
Mao's reeducation camps. Authoritarian Communism is, and should be, for- 
ever tainted by those real-world laboratories. 

But what of the contemporary crusade to liberate world markets? The 
coups, wars and slaughters to install and maintain pro-corporate regimes 
have never been treated as capitalist crimes but have instead been written off 
as the excesses of overzealous dictators, as hot fronts of the Cold War, and 
now of the War on Terror. If the most committed opponents of the corpo- 
ratist economic model are systematically eliminated, whether in Argentina 
in the seventies or in Iraq today, that suppression is explained as part of the 
dirty fight against Communism or terrorism— almost never as the fight for 
the advancement of pure capitalism. 

I am not arguing that all forms of market systems are inherently violent. It 
is eminently possible to have a market-based economy that requires no such 
brutality and demands no such ideological purity. A free market in con- 
sumer products can coexist with free public health care, with public schools, 
with a large segment of the economy— like a national oil company— held in 
state hands. It's equally possible to require corporations to pay decent wages, 
to respect the right of workers to form unions, and for governments to tax and 
redistribute wealth so that the sharp inequalities that mark the corporatist 
state are reduced. Markets need not be fundamentalist. 

Keynes proposed exactly that kind of mixed, regulated economy after the 
Great Depression, a revolution in public policy that created the New Deal 
and transformations like it around the world. It was exactly that system of 
compromises, checks and balances that Friedman's counterrevolution was 
launched to methodically dismantle in country after country. Seen in that 
light, the Chicago School strain of capitalism does indeed have something in 
common with other dangerous ideologies: the signature desire for unattain- 
able purity, for a clean slate on which to build a reengineered model society. 

This desire for godlike powers of total creation is precisely why free- 
market ideologues are so drawn to crises and disasters. Nonapocalyptic real- 
ity is simply not hospitable to their ambitions. For thirty-five years, what has 
animated Friedman's counterrevolution is an attraction to a kind of freedom 
and possibility available only in times of cataclysmic change — when people, 


with their stubborn habits and insistent demands, are blasted out of the 
way— moments when democracy seems a practical impossibility. 

Believers in the shock doctrine are convinced that only a great rupture — a 
flood, a war, a terrorist attack— can generate the kind of vast, clean canvases 
they crave. It is in these malleable moments, when we are psychologically 
unmoored and physically uprooted, that these artists of the real plunge in 
their hands and begin their work of remaking the world. 




We shall squeeze you empty, and then we shall fill you 
with ourselves. 

—George Orwell, Nineteen Eighty-Four 

The Industrial Revolution was merely the beginning of 
a revolution as extreme and radical as ever inflamed 
the minds of sectarians, but the problems could be 
resolved given an unlimited amount of material com- 

— Karl Polanyi, The Great Transformation 




Their minds seem like clean slates upon which we can write. 

—Dr. Cyril J. C. Kennedy and Dr. David Anchel on the benefits of 
electroshock therapy, 1948 1 

I went to the slaughterhouse to observe this so-called "electric 
slaughtering," and I saw that the hogs were clamped at the tem- 
ples with big metallic tongs which were hooked up to an electric 
current (125 volts). As soon as the hogs were clamped by the 
tongs, they fell unconscious, stiffened, then after a few seconds 
they were shaken by convulsions in the same way as our experi- 
mental dogs. During this period of unconsciousness (epileptic 
coma), the butcher stabbed and bled the animals without difficulty. 
— Ugo Cerletti, a psychiatrist, describing how he "invented" elec- 
troshock therapy, 1954 2 

"I don't talk to journalists anymore/' says the strained voice at the other end 
of the phone. And then a tiny window: "What do you want?" 

I figure I have about twenty seconds to make my case, and it won't be 
easy. How do I explain what I want from Gail Kastner, the journey that 
brought me to her? 

The truth seems so bizarre: "I am writing a book about shock. About how 
countries are shocked— by wars, terror attacks, coups d'etat and natural dis- 
asters. And then how they are shocked again — by corporations and politi- 
cians who exploit the fear and disorientation of this first shock to push 


through economic shock therapy. And then how people who dare to resist 
this shock politics are, if necessary, shocked for a third time— by police, sol- 
diers and prison interrogators. I want to talk to you because you are by my es- 
timation among the most shocked people alive, being one of the few living 
survivors of the CIA's covert experiments in electroshock and other 'special 
interrogation techniques/ And by the way, I have reason to believe that the 
research that was done on you in the 1950s at McGill University is now be- 
ing applied to prisoners in Guantanamo Bay and Abu Ghraib." 

No, I definitely can't say that. So I say this instead: "I recently traveled to 
Iraq, and I am trying to understand the role torture is playing there. We are 
told it's about getting information, but I think it's more than that— I think it 
may also have had to do with trying to build a model country, about erasing 
people and then trying to remake them from scratch." 

There is a long pause, and then a different tone of voice to the reply, still 
strained but ... is it relief? "You have just spelled out exactly what the CIA 
and Ewen Cameron did to me. They tried to erase and remake me. But it 
didn't work." 

In less than twenty-four hours, I am knocking on the door of Gail Kast- 
ner's apartment in a grim Montreal old-age home. "It's open," comes a barely 
audible voice. Gail had told me she would leave the door unlocked because 
standing up is difficult for her. It's the tiny fractures down her spine that grow 
more painful as arthritis sets in. Her back pain is just one reminder of the 
sixty-three times that 150 to 200 volts of electricity penetrated the frontal 
lobes of her brain, while her body convulsed violently on the table, causing 
fractures, sprains, bloody lips, broken teeth. 

Gail greets me from a plush blue recliner. It has twenty positions, I later 
learn, and she adjusts them continuously, like a photographer trying to find 
focus. It is in this chair that she spends her days and nights, searching for 
comfort, trying to avoid sleep and what she calls "my electric dreams." That's 
when she sees "him": Dr. Ewen Cameron, the long-dead psychiatrist who 
administered those shocks, as well as other torments, so many years ago. "I 
had two visits from the Eminent Monster last night," she announces as soon 
as I walk in. "I don't want to make you feel bad, but it's because of your call 
coming out of the blue like that, asking all those questions." 

I become aware that my presence here is very possibly unfair. This feeling 
deepens when I scan the apartment and realize that there is no place for me. 
Every single surface is crowded with towers of papers and books, precariously 
stacked but clearly in some kind of order, the books all marked with yellowing 



flags. Gail motions me to the one clear surface in the room, a wooden chair 
that I had overlooked, but she goes into minor panic when I ask for a four- 
inch space for the recorder. The end table beside her chair is out of the ques- 
tion: it is home to about twenty empty boxes of cigarettes, Matinee Regular, 
stacked in a perfect pyramid. (Gail had warned me on the phone about the 
chain-smoking: "Sorry, but I smoke. And I'm a poor eater. I'm fat and I 
smoke. I hope that's okay.") It looks as if Gail has colored the insides of the 
boxes black, but looking closer, I realize it is actually extremely dense, mi- 
nuscule handwriting: names, numbers, thousands of words. 

Over the course of the day we spend talking, Gail often leans over to write 
something on a scrap of paper or a cigarette box— "a note to myself," she ex- 
plains, "or I will never remember." The thickets of paper and cigarette boxes 
are, for Gail, something more than an unconventional filing system. They 
are her memory. 

For her entire adult life, Gail's mind has failed her; facts evaporate instantly, 
memories, if they are there (and many aren't), are like snapshots scattered on 
the ground. Sometimes she will remember an incident perfectly— what she 
calls "a memory shard"— but when asked for a date, she will be as much as 
two decades off. "In 1968," she will say. "No, 1983." And so she makes lists 
and keeps everything, proof that her life actually happened. At first she apol- 
ogizes for the clutter. But later she says, "He did this to me! This apartment is 
part of the torture!" 

For many years, Gail was quite mystified by her lack of memory, as well 
as other idiosyncrasies. She did not know, for instance, why a small electrical 
shock from a garage door opener set off an uncontrollable panic attack. Or 
why her hands shook when she plugged in her hair dryer. Most of all, she 
could not understand why she could remember most events from her adult 
life but almost nothing from before she turned twenty. When she ran into 
someone who claimed to know her from childhood, she'd say, " 'I know who 
you are but I can't quite place you.' I faked it." 

Gail figured it was all part of her shaky mental health. In her twenties and 
thirties, she had struggled with depression and addiction to pills and would 
sometimes have such severe breakdowns that she would end up hospitalized 
and comatose. These episodes provoked her family to disown her, leaving 
her so alone and desperate that she survived by scavenging from the bins out- 
side grocery stores. 

There had also been hints that something even more traumatic had hap- 
pened early on. Before her family cut ties, Gail and her identical twin sister 


used to have arguments about a time when Gail had been much sicker and 
Zella had had to take care of her. "You have no idea what I went through " 
Zella would say. "You would urinate on the living-room floor and suck your 
thumb and talk baby talk and you would demand the bottle of my baby. 
That's what I had to put up with!" Gail had no idea what to make of her 
twin's recriminations. Urinating on the floor? Demanding her nephew's bot- 
tle? She had no memory of ever doing such strange things. 

In her late forties, Gail began a relationship with a man named Jacob, 
whom she describes as her soul mate. Jacob was a Holocaust survivor, and 
he was also preoccupied with questions of memory and loss. For Jacob, who 
died more than a decade ago, Gail's unaccountably missing years were in- 
tensely troubling. "There has to be a reason," he would say about the gaps in 
her life. "There has to be a reason." 

In 1992, Gail and Jacob happened to pass by a newsstand with a large, 
sensational headline: "Brainwashing Experiments: Victims to Be Compen- 
sated." Kastner started skimming the article, and several phrases immediately 
leaped out: "baby talk," "memory loss," "incontinence." "I said, 7 ac ob, buy 
this paper.'" Sitting in a nearby coffee shop, the couple read an incredible 
story about how, in the 1950s, the United States Central Intelligence Agency 
had funded a Montreal doctor to perform bizarre experiments on his psychi- 
atric patients, keeping them asleep and in isolation for weeks, then adminis- 
tering huge doses of electroshock as well as experimental drug cocktails 
including the psychedelic LSD and the hallucinogen PCP, commonly known 
as angel dust. The experiments— which reduced patients to preverbal, infan- 
tile states — had been performed at McGill University's Allan Memorial In- 
stitute under the supervision of its director, Dr. Ewen Cameron. The CIA's 
funding of Cameron had been revealed in the late seventies through a Free- 
dom of Information Act request, sparking hearings in the U.S. Senate. Nine 
of Cameron's former patients got together and sued the CIA as well as the 
Canadian government, which had also funded Cameron's research. Over 
protracted trials, the patients' lawyers argued that the experiments had vio- 
lated all standards of medical ethics. They had gone to Cameron seeking re- 
lief from minor psychiatric ailments — postpartum depression, anxiety, even 
for help to deal with marital difficulties — and had been used, without their 
knowledge or permission, as human guinea pigs to satisfy the CIA's thirst for 
information about how to control the human mind. In 1988, the CIA settled, 
awarding a total of $750,000 in damages to the nine plaintiffs— at the time 
the largest settlement ever against the agency. Four years later, the Canadian 


government would agree to pay $100,000 in compensation to each patient 
who was part of the experiments. 3 

Not only did Cameron play a central role in developing contemporary 
U.S. torture techniques, but his experiments also offer a unique insight into 
the underlying logic of disaster capitalism. Like the free-market economists 
who are convinced that only a large-scale disaster— a great unmaking— can 
prepare the ground for their "reforms," Cameron believed that by inflicting 
an array of shocks to the human brain, he could unmake and erase faulty 
minds, then rebuild new personalities on that ever-elusive clean slate. 

Gail had been dimly aware of a story involving the CIA and McGill over 
the years, but she hadn't paid attention — she had never had anything to do 
with the Allan Memorial Institute. But now, sitting with Jacob, she focused 
on what the ex-patients were saying about their lives— the memory loss, the 
regression. "I realized then that these people must have gone through the 
same thing I went through. I said, 'Jacob, this has got to be the reason.' " 

In the Shock Shop 

Kastner wrote to the Allan and requested her medical file. After first being 
told that they had no record of her, she finally got it, all 1 38 pages. The doc- 
tor who had admitted her was Ewen Cameron. 

The letters, notes and charts in Gail's medical file tell a heartbreaking 
story, one as much about the limited choices available to an eighteen-year- 
old girl in the fifties as about governments and doctors abusing their power. 
The file begins with Dr. Cameron's assessment of Gail on her admittance: 
she is a McGill nursing student, excelling in her studies, whom Cameron 
describes as "a hitherto reasonably well balanced individual." She is, how- 
ever, suffering from anxiety, caused, Cameron plainly notes, by her abusive 
father, an "intensely disturbing" man who made "repeated psychological as- 
saults" on his daughter. 

In their early notes, the nurses seem to like Gail; she bonds with them 
about nursing, and they describe her as "cheerful," "sociable" and "neat." 
But over the months she spent in and out of their care, Gail underwent a rad- 
ical personality transformation, one that is meticulously documented in the 
file: after a few weeks, she "showed childish behaviour, expressed bizarre 
ideas, and apparently was hallucinated [sic] and destructive." The notes re- 
port that this intelligent young woman could now manage to count only to 
six; next she is "manipulative, hostile and very aggressive"; then, passive and 


listless, unable to recognize her family members. Her final diagnosis is 
"schizophrenic . . . with marked hysterical features"— far more serious than 
the "anxiety" she displayed when she arrived. 

The metamorphosis no doubt had something to do with the treatments 
that are also all listed in Kastner's chart: huge doses of insulin, inducing 
multiple comas; strange combinations of uppers and downers; long periods 
when she was kept in a drug-induced sleep; and eight times as many elec- 
troshocks as was standard at the time. 

Often the nurses remark on Kastner's attempts to escape from her doctors: 
"Trying to find way out . . . claims she is being ill treated . . . refused to have 
her ECT after having her injection." These complaints were invariably 
treated as cause for another trip to what Cameron's junior colleagues called 
"the shock shop." 4 

The Quest for Blankness 

After reading over her medical file several times, Gail Kastner turned herself 
into a kind of archaeologist of her own life, collecting and studying every- 
thing that could potentially explain what happened to her at the hospital. 
She learned that Ewen Cameron, a Scottish-born American citizen, had 
reached the very pinnacle of his profession: he had been president of the 
American Psychiatric Association, president of the Canadian Psychiatric As- 
sociation and president of the World Psychiatric Association. In 1945, he was 
one of only three American psychiatrists asked to testify to the sanity of 
Rudolf Hess at the war crimes trials in Nuremberg. 5 

By the time Gail began her investigation, Cameron was long dead, but he 
had left dozens of academic papers and published lectures behind. Several 
books had also been published about the CIA's funding of mind-control 
experiments, works that included plenty of detail about Cameron's relation- 
ship to the agency.* Gail read them all, marking relevant passages, making 
timelines and cross-referencing the dates with her own medical file. What 
she came to understand was that, by the early 1950s, Cameron had rejected 
the standard Freudian approach of using "talk therapy" to try to uncover the 

These include Anne Collins's Governor General's Award-winning In the Sleep Room, John 
Marks's The Search for the Manchurian Candidate, Alan Scheflin and Edward Option Jr.'s The 
Mind Manipulators, Walter Bowart's Operation Mind Control, Gordon Thomas's Journey into 
Madness and Harvey Weinstein's A Father, a Son and the CIA, written by the psychiatrist son of 
one of Cameron's patients. 


"root causes" of his patients' mental illnesses. His ambition was not to mend 
or repair his patients but to re-create them using a method he invented 
called "psychic driving." 6 

According to his published papers from the time, he believed that the only 
way to teach his patients healthy new behaviors was to get inside their minds 
and "break up old pathological patterns." 7 The first step was "depatterning," 
which had a stunning goal: to return the mind to a state when it was, as Aris- 
totle claimed, "a writing tablet on which as yet nothing actually stands writ- 
ten," a tabula rasa. 8 Cameron believed he could reach that state by attacking 
the brain with everything known to interfere with its normal functioning— 
all at once. It was "shock and awe" warfare on the mind. 

By the late 1940s, electroshock was becoming increasingly popular 
among psychiatrists in Europe and North America. It caused less permanent 
damage than surgical lobotomy, and it seemed to help: hysterical patients 
frequently calmed down, and in some cases, the jolt of electricity appeared 
to make the person more lucid. But these were only observations, and even 
the doctors who developed the technique could not provide a scientific ex- 
planation for how it worked. 

They were aware of its side effects, though. There was no question that 
ECT could result in amnesia; it was by far the most common complaint as- 
sociated with the treatment. Closely related to memory loss, the other side ef- 
fect widely reported was regression. In dozens of clinical studies, doctors 
noted that in the immediate aftermath of treatment, patients sucked their 
thumbs, curled up in the fetal position, needed to be spoon-fed, and cried 
for their mothers (often mistaking doctors and nurses for parents). These be- 
haviors usually passed quickly, but in some cases, when large doses of shock 
were used, doctors reported that their patients had regressed completely, for- 
getting how to walk and talk. Marilyn Rice, an economist who, in the mid- 
seventies, spearheaded a patients' rights movement against ECT, vividly 
described what it was like to have her memories and much of her education 
erased by shock treatments. "Now I know how Eve must have felt, having 
been created full grown out of somebody's rib without any past history. I feel 
as empty as Eve."* 9 

For Rice and others, that emptiness represented an irreplaceable loss. 

* Even today, when ECT, much refined and including procedures to ensure the safety and 
comfort of patients, has become a respectable and often effective treatment of psychosis, 
temporary short-term memory loss remains a side effect. Some patients still report that 
their long-term memories have also been impacted. 


Cameron, on the other hand, looked into that same void and saw something 
else: the blank slate, cleared of bad habits, on which new patterns could be 
written. For him, "massive loss of all recollections" brought on by intensive 
ECT wasn't an unfortunate side effect; it was the essential point of the treat- 
ment, the key to bringing the patient back to an earlier stage of development 
"long before schizophrenic thinking and behavior made their appear- 
ance." 10 Like pro-war hawks who call for the bombing of countries "back to 
the stone age," Cameron saw shock therapy as a means to blast his patients 
back into their infancy, to regress them completely. In a 1962 paper, he de- 
scribed the state to which he wanted to reduce patients like Gail Kastner: 
"There is not only a loss of the space-time image but loss of all feeling that it 
should be present. During this stage the patient may show a variety of other 
phenomena, such as loss of a second language or all knowledge of his mari- 
tal status. In more advanced forms, he may be unable to walk without sup- 
port, to feed himself, and he may show double incontinence. ... All aspects 
of his memorial function are severely disturbed." 11 

To "depattern" his patients, Cameron used a relatively new device called 
the Page-Russell, which administered up to six consecutive jolts instead of a 
single one. Frustrated that his patients still seemed to be clinging to rem- 
nants of their personalities, he further disoriented them with uppers, downers 
and hallucinogens: chlorpromazine, barbiturates, sodium amytal, nitrous 
oxide, desoxyn, Seconal, Nembutal, Veronal, Melicone, Thorazine, largactil 
and insulin. Cameron wrote in a 1956 paper that these drugs served to "dis- 
inhibit him [the patient] so that his defenses might be reduced." 12 

Once "complete depatterning" had been achieved, and the earlier per- 
sonality had been satisfactorily wiped out, the psychic driving could begin. It 
consisted of Cameron playing his patients tape-recorded messages such as 
"You are a good mother and wife and people enjoy your company." As a be- 
haviorist, he believed that if he could get his patients to absorb the messages 
on the tape, they would start behaving differently.* 

With patients shocked and drugged into an almost vegetative state, they 
could do nothing but listen to the messages— for sixteen to twenty hours a 
day for weeks; in one case, Cameron played a message continuously for 101 
days. 13 

* If Cameron had been slightly less powerful in his field, his "psychic driving" tapes would 
surely have been dismissed as a cheap joke. The entire idea came to him from an advertise- 
ment for the Cerebrophone, a bedside phonograph with pillow speakers that claimed to be "a 
revolutionary way to learn a foreign language while you sleep." 


In the mid-fifties, several researchers at the CIA became interested in 
Cameron's methods. It was the start of Cold War hysteria, and the agency 
had just launched a covert program devoted to researching "special interro- 
gation techniques." A declassified CIA memorandum explained that the pro- 
gram "examined and investigated numerous unusual techniques of 
interrogation including psychological harassment and such matters as 'total 
isolation"' as well as "the use of drugs and chemicals." 14 First code-named 
Project Bluebird, then Project Artichoke, it was finally renamed MKUltra in 
1953. Over the next decade, MKUltra would spend $25 million on research 
in a quest to find new ways to break prisoners suspected of being Commu- 
nists and double agents. Eighty institutions were involved in the program, 
including forty-four universities and twelve hospitals. 15 

The agents involved had no shortage of creative ideas for how to extract 
information from people who would rather not share it— the problem was 
finding ways to test those ideas. Activities in the first few years of Project 
Bluebird and Artichoke resembled those in a tragicomic spy film in which 
CIA agents hypnotized each other and slipped LSD into their colleagues' 
drinks to see what would happen (in at least one case, suicide) — not to men- 
tion torturing suspected Russian spies. 16 

The tests were more like deadly fraternity pranks than serious research, 
and the results didn't provide the kind of scientific certainty the agency was 
looking for. For this they needed large numbers of human test subjects. Sev- 
eral such trials were attempted, but they were risky: if word got out that the 
CIA was testing dangerous drugs on American soil, the entire program could 
be shut down. 17 Which is where the CIA's interest in Canadian researchers 
came in. The relationship dates back to June 1, 1951, and a trinational meet- 
ing of intelligence agencies and academics at Montreal's Ritz-Carlton Hotel. 
The subject of the meeting was growing concern in the Western intelligence 
community that the Communists had somehow discovered how to "brain- 
wash" prisoners of war. The evidence was the fact that American GIs taken 
captive in Korea were going before cameras, seemingly willingly, and de- 
nouncing capitalism and imperialism. According to the declassified minutes 
from the Ritz meeting, those in attendance — Omond Solandt, chairman of 
Canada's Defense Research Board; Sir Henry Tizard, chairman of the 
British Defense Research Policy Committee; as well as two representatives 
from the CIA— were convinced that Western powers urgently needed to dis- 
cover how the Communists were extracting these remarkable confessions. 
With that in mind, the first step was to conduct "a clinical study of actual 


cases" to see how brainwashing might work. 18 The stated goal of this re- 
search was not for Western powers to start using mind control on prisoners; it 
was to prepare Western soldiers for whatever coercive techniques they might 
encounter if they were taken hostage. 

The CIA, of course, had other interests. Yet even in closed-door meetings 
like the one at the Ritz, it would have been impossible, so soon after revela- 
tions of Nazi torture had provoked worldwide revulsion, for the agency to 
openly admit it was interested in developing alternative interrogation meth- 
ods of its own. 

One of those at the Ritz meeting was Dr. Donald Hebb, director of psy- 
chology at McGill University. According to the declassified minutes, Hebb, 
trying to unlock the mystery of the GI confessions, speculated that the 
Communists might be manipulating prisoners by placing them in intensive 
isolation and blocking input to their senses. The intelligence chiefs were im- 
pressed, and three months later Hebb had a research grant from Canada's 
Department of National Defense to conduct a series of classified sensory- 
deprivation experiments. Hebb paid a group of sixty-three McGill students 
$20 a day to be isolated in a room wearing dark goggles, headphones playing 
white noise and cardboard tubes covering their arms and hands so as to in- 
terfere with their sense of touch. For days, the students floated in a sea of 
nothingness, their eyes, ears and hands unable to orient them, living inside 
their increasingly vivid imaginations. To see whether this deprivation made 
them more susceptible to "brainwashing," Hebb then began playing record- 
ings of voices talking about the existence of ghosts or the dishonesty of 
science — ideas the students had said they found objectionable before the ex- 
periment began. 19 

In a confidential report on Hebb's findings, the Defense Research Board 
concluded that sensory deprivation clearly caused extreme confusion as well 
as hallucinations among the student test subjects and that "a significant tem- 
porary lowering of intellectual efficiency occurred during and immediately 
after the period of perceptual deprivation." 20 Furthermore, the students' 
hunger for stimulation made them surprisingly receptive to the ideas ex- 
pressed on the tapes, and indeed several developed an interest in the occult 
that lasted weeks after the experiment had come to an end. It was as if the 
confusion from sensory deprivation partially erased their minds, and then the 
sensory stimuli rewrote their patterns. 

A copy of Hebb's major study was sent to the CIA, as well as forty-one 
copies to the U.S. Navy and forty-two copies to the U.S. Army. 21 The CIA 


also directly monitored the findings via one of Hebb's student researchers, 
Maitland Baldwin, who, unbeknownst to Hebb, was reporting to the 
agency. 22 This keen interest was hardly surprising: at the very least, Hebb was 
proving that intensive isolation interfered with the ability to think clearly and 
made people more open to suggestion— priceless ideas for any interrogator. 
Hebb eventually realized that there was enormous potential for his research 
to be used not just to protect captured soldiers from getting "brainwashed" 
but also as a kind of how-to manual for psychological torture. In the last in- 
terview he gave before his death in 1985, Hebb said, "It was clear when we 
made our report to the Defense Research Board that we were describing for- 
midable interrogation techniques." 23 

Hebb's report noted that four of the subjects "remarked spontaneously 
that being in the apparatus was a form of torture," which meant that forcing 
them to stay past their threshold — two or three days — would clearly violate 
medical ethics. Aware of the limitations this placed on the experiment, 
Hebb wrote that more "clearcut results" were not available because "it is 
not possible to force subjects to spend 30 to 60 days in conditions of per- 
ceptual isolation." 24 

Not possible for Hebb, but it was perfectly possible for his McGill col- 
league and academic archrival, Dr. Ewen Cameron. (In a suspension of ac- 
ademic niceties, Hebb would later describe Cameron as "criminally 
stupid.") 25 Cameron had already convinced himself that violent destruction 
of the minds of his patients was the necessary first step on their journey to 
mental health and therefore not a violation of the Hippocratic oath. As for 
consent, his patients were at his mercy; the standard consent form endowed 
Cameron with absolute power to treat, up to and including performing full 
frontal lobotomies. 

Although he had been in contact with the agency for years, in 1957 
Cameron got his first grant from the CIA, laundered through a front organi- 
zation called the Society for the Investigation of Human Ecology. 26 And, as 
the CIA dollars poured in, the Allan Memorial Institute seemed less like a 
hospital and more like a macabre prison. 

The first changes were the dramatically increased dosages of elec- 
troshock. The two psychiatrists who invented the controversial Page-Russell 
electroshock machine had recommended four treatments per patient, total- 
ing twenty-four individual shocks. 27 Cameron started using the machine on 
his patients twice a day for thirty days, a terrifying 360 individual shocks to 
each patient— far more than his earlier patients, like Gail, had received. 28 To 


the already dizzying array of drugs he was giving his patients, he added more 
experimental, mind-altering ones that were of particular interest to the CIA: 
LSD and PCP. 

He also added other weapons to his mind-blanking arsenal: sensory depri- 
vation and extended sleep, a twin process he claimed would further "reduce 
the defensiveness of the individual," making the patient more receptive to 
his taped messages. 29 When the CIA dollars arrived, Cameron used the grant 
money to convert the old horse stables behind the hospital into isolation 
boxes. He also elaborately renovated the basement so that it contained a room 
he called the Isolation Chamber. 30 He soundproofed the room, piped in white 
noise, turned off the lights and put dark goggles and "rubber eardrums" on 
each patient, as well as cardboard tubing on the hands and arms, "preventing 
him from touching his body— thus interfering with his self image," as 
Cameron put it in a 1956 paper. 31 But, where Hebb's students fled less intense 
sensory deprivation after only a couple of days, Cameron kept his patients in 
for weeks, with one of them trapped in the isolation box for thirty-five days. 32 

Cameron further starved his patients' senses in the so-called Sleep Room, 
where they were kept in drug-induced reverie for twenty to twenty-two hours 
a day, turned by nurses every two hours to prevent bed sores and wakened 
only for meals and to go to the toilet. 33 Patients were kept in this state for fif- 
teen to thirty days, though Cameron reported that "some patients have been 
treated up to 65 days of continuous sleep." 34 Hospital staffers were instructed 
not to allow patients to talk and not to give out any information about how 
long they would have to spend in the room. To make sure no one success- 
fully escaped from this nightmare, Cameron gave one group of patients 
small doses of the drug Curare, which induces paralysis, making them literal 
prisoners in their own bodies. 35 

In a 1960 paper, Cameron said there are "two major factors" that allow us 
to "maintain a time and space image"— that allow us, in other words, to 
know where we are and who we are. Those two forces are "(a) our continued 
sensory input, and (b) our memory." With electroshock, Cameron annihi- 
lated memory; with his isolation boxes, he annihilated sensory input. He was 
determined to force his patients to completely lose their sense of where they 
were in time and space. Realizing that some patients were keeping track of 
time of day based on their meals, Cameron ordered the kitchen to mix it all 
up, changing meal times and serving soup for breakfast and porridge for 
dinner. "By varying these intervals and by changing the menu from the ex- 
pected time we were able to break up this structuring," Cameron reported 



with satisfaction. Even so, he discovered that despite his best efforts, one pa- 
tient had maintained a connection with the outside world by noting "the 
very faint rumble" of a plane that flew over the hospital every morning at 
nine. 36 

To anyone familiar with the testimonies of torture survivors, this detail is 
a harrowing one. When prisoners are asked how they survived months or 
years of isolation and brutality, they often speak about hearing the ring of dis- 
tant church bells, or the Muslim call to prayer, or children playing in a park 
nearby. When life is shrunk to the four walls of the prison cell, the rhythm of 
these outside sounds becomes a kind of lifeline, proof that the prisoner is still 
human, that there is a world beyond torture. "Four times I heard the birds 
outside chirping with the rising sun — that's how I know it was four days," said 
one survivor of Uruguay's last dictatorship, recalling a particularly brutal 
stretch of torture. 37 The unidentified woman in the basement of the Allan 
Memorial Institute, straining to hear the engine of an airplane through a 
haze of darkness, drugs and electroshock, was not a patient in the care of a 
doctor; she was, for all intents and purposes, a prisoner undergoing torture. 

There are several strong indications that Cameron was well aware he was 
simulating torture conditions and that, as a staunch anti-Communist, he rel- 
ished the idea that his patients were part of a Cold War effort. In an interview 
with a popular magazine in 1955, he openly compared his patients to POWs 
facing interrogation, saying that they, "like prisoners of the Communists, 
tended to resist [treatment] and had to be broken down " 38 A year later, he 
wrote that the purpose of depatterning was "the actual 'wearing down' of de- 
fenses" and noted that "analogous to this is the breakdown of the individual 
under continuous interrogation." 39 By 1960, Cameron was giving lectures on 
his sensory deprivation research not just to other psychiatrists but also to mil- 
itary audiences. In a talk delivered in Texas at the Brooks Air Force Base, he 
made no claim that he was curing schizophrenia and in fact admitted that 
sensory deprivation "produces the primary symptoms of schizophrenia" — 
hallucinations, intense anxiety, loss of touch with reality. 40 In notes for the 
lecture, he mentions following sensory deprivation with "input-overload," a 
reference to his use of electroshock and endlessly repeated tape loops — and 
a foreshadowing of interrogation tactics to come. 41 

Cameron's work was funded by the CIA until 1961 , and for many years it 
wasn't clear what, if anything, the U.S. government did with his research. In 
the late seventies and eighties, when proof of the CIA's funding for the ex- 
periments finally came out in Senate hearings and then in the patients' 


groundbreaking class-action lawsuit against the agency, journalists and legis- 
lators tended to accept the CIA's version of events— that it was conducting 
research into brainwashing techniques in order to protect captured U.S. sol- 
diers. Most of the press attention focused on the sensational detail that the 
government had been funding acid trips. In fact, a large part of the scandal, 
when it finally broke, was that the CIA and Ewen Cameron had recklessly 
shattered lives with their experiments for no good reason— the research ap- 
peared useless: everyone knew by then that brainwashing was a Cold War 
myth. The CIA, for its part, actively encouraged this narrative, much prefer- 
ring to be mocked as bumbling sci-fi buffoons than for having funded a tor- 
ture laboratory at a respected university— and an effective one at that. When 
John Gittinger, the CIA psychologist who first reached out to Cameron, was 
forced to testify before a joint Senate hearing, he called the support for 
Cameron "a foolish mistake. ... A terrible mistake." 42 When the hearings 
asked Sidney Gottlieb, former director of MKUltra, to explain why he had 
ordered all the files destroyed from the $25 million program, he replied that 
"the project MKUltra had not yielded any results of real positive value to the 
Agency." 43 In the exposes of MKUltra from the eighties, both in investigative 
accounts in the mainstream press and in books, the experiments are consis- 
tently described as "mind control" and "brainwashing." The word "torture" 
is almost never used. 

The Science of Fear 

In 1988, The New York Times ran a groundbreaking investigation into U.S. in- 
volvement in torture and assassinations in Honduras. Florencio Caballero, an 
interrogator with Honduras s notoriously brutal Battalion 3-16, told the Times 
that he and twenty-four of his colleagues were taken to Texas and trained by 
the CIA. "They taught us psychological methods— to study the fears and weak- 
nesses of a prisoner. Make him stand up, don't let him sleep, keep him naked 
and isolated, put rats and cockroaches in his cell, give him bad food, serve him 
dead animals, throw cold water on him, change the temperature." There was 
one technique he failed to mention: electroshock. Ines Murillo, a twenty-four- 
year-old prisoner who was "interrogated" by Caballero and his colleagues, told 
the Times that she was electrocuted so many times that she "screamed and fell 
down from the shock. The screams just escape you," she said. "I smelled 
smoke and realized I was burning from the singes of the shocks. They said they 
would torture me until I went mad. I didn't believe them. But then they spread 


my legs and stuck the wires on my genitals." 44 Murillo also said that there was 
someone else in the room: an American passing questions to her interrogators 
whom the others called "Mr. Mike." 4 ' 

The revelations led to hearings of the Senate's Select Committee on Intel- 
ligence, where the CIA's deputy director, Richard Stolz, confirmed that "Ca- 
ballero did indeed attend a CIA human resources exploitation or 
interrogation course." 46 The Baltimore Sun filed a Freedom of Information 
Act request for the course material used to train people like Caballero. For 
many years the CIA refused to comply; finally, under threat of a lawsuit, and 
nine years after the original story was published, the CIA produced a hand- 
book called Kubark Counterintelligence Interrogation. The title was in code: 
"Kubark" is, according to The New York Times, "a cryptonym, KU a random 
diptych and BARK the agency's code word for itself at that time." More recent 
reports have speculated that the "ku" referred to "a country or a specific clan- 
destine or covert activity." 47 The handbook is a 128-page secret manual on 
the "interrogation of resistant sources" that is heavily based on the research 
commissioned by MKUltra — and Ewen Cameron's and Donald Hebb's ex- 
periments have left their marks all over it. Methods range from sensory depri- 
vation to stress positions, from hooding to pain. (The manual acknowledges 
early on that many of these tactics are illegal and instructs interrogators to 
seek "prior Headquarters approval . . . under any of the following circum- 
stances: 1. If bodily harm is to be inflicted. 2. If medical, chemical, or electri- 
cal methods or materials are to be used to induce acquiescence.") 48 

The manual is dated 1963, the final year of the MKUltra program and 
two years after Cameron's CIA-funded experiments came to a close. The 
handbook claims that if the techniques are used properly, they will take a re- 
sistant source and "destroy his capacity for resistance." This, it turns out, was 
the true purpose of MKUltra: not to research brainwashing (that was a mere 
side project), but to design a scientifically based system for extracting infor- 
mation from "resistant sources." 49 In other words, torture. 

The manual states on its first page that it is about to describe interrogation 
methods based on "extensive research, including scientific inquiries con- 
ducted by specialists in closely related subjects." It represents a new age of 
precise, refined torture— not the gory, inexact torment that had been the 
standard since the Spanish Inquisition. In a kind of preface, the manual 
states: "The intelligence service which is able to bring pertinent, modern 
knowledge to bear upon its problems enjoys huge advantages over a service 
which conducts its clandestine business in eighteenth century fashion ... it 


is no longer possible to discuss interrogation significantly without reference 
to the psychological research conducted in the past decade." 50 What follows 
is a how-to guide on dismantling personalities. 

The manual includes a lengthy section on sensory deprivation that refers 
to "a number of experiments at McGill University." 51 It describes how to 
build isolation chambers and notes that "the deprivation of stimuli induces 
regression by depriving the subject's mind of contact with an outer world 
and thus forcing it in upon itself. At the same time, the calculated provision 
of stimuli during interrogation tends to make the regressed subject view the 
interrogator as a father-figure." 52 The Freedom of Information Act request 
also produced an updated version of the manual, first published in 1983 for 
use in Latin America. "Window should be set high in the wall with the ca- 
pability of blocking out light/' it states.* 53 

It is precisely what Hebb feared: the use of his sensory deprivation meth- 
ods as "formidable interrogation techniques." But it is the work of Cameron, 
and his recipe for disturbing "the time-space-image," that forms the core of 
the Kubark formula. The manual describes several of the techniques that 
were honed to depattern patients in the basement of the Allan Memorial 
Institute: "The principle is that sessions should be so planned as to disrupt 
the source's sense of chronological order. . . . Some interrogatees can be re- 
gressed by persistent manipulation of time, by retarding and advancing 
clocks and serving meals at odd times— ten minutes or ten hours after the 
last food was given. Day and night are jumbled." 54 

What most captured the imagination of Kubark's authors, more than any in- 
dividual technique, was Cameron's focus on regression— the idea that by depriv- 
ing people of their sense of who they are and where they are in time and space, 
adults can be converted into dependent children whose minds are a blank slate 
of suggestibility. Again and again, the authors return to the theme. "All of the 
techniques employed to break through an interrogation roadblock, the entire 
spectrum from simple isolation to hypnosis and narcosis, are essentially ways of 
speeding up the process of regression. As the interrogatee slips back from matu- 
rity toward a more infantile state, his learned or structured personality traits fall 
away." That is when the prisoner goes into the state of "psychological shock" or 
"suspended animation" referred to earlier— that torturer's sweet spot when "the 
source is far more open to suggestion, far likelier to comply." 55 

*The 1983 version is clearly geared to classroom use, complete with pop quizzes and friendly 
reminders ("Always start each session with fresh batteries"). 


Alfred W. McCoy, a historian at the University of Wisconsin who docu- 
mented the evolution of torture techniques since the Inquisition in his book 
A Question of Torture: CIA Interrogation from the Cold War to the War on 
Terror, describes the Kubark manual's shock-inducing formula of sensory 
deprivation followed by sensory overload as "the first real revolution in the 
cruel science of pain in more than three centuries." 56 And according to Mc- 
Coy, it couldn't have happened without the McGill experiments in the 
1950s. "Stripped of its bizarre excesses, Dr. Cameron's experiments, build- 
ing upon Dr. Hebb's earlier breakthrough, laid the scientific foundation for 
the CIA's two-stage psychological torture method." 57 

Wherever the Kubark method has been taught, certain clear patterns— all 
designed to induce, deepen and sustain shock— have emerged: prisoners are 
captured in the most jarring and disorienting way possible, late at night or in 
early-morning raids, as the manual instructs. They are immediately hooded 
or blindfolded, stripped and beaten, then subjected to some form of sensory 
deprivation. And from Guatemala to Honduras, Vietnam to Iran, the Philip- 
pines to Chile, the use of electroshock is ubiquitous. 

This was not, of course, all the influence of Cameron or MKUltra. Tor- 
ture is always an improvisation, a combination of learned technique and the 
human instinct for brutality that is unleashed wherever impunity reigns. By 
the mid-fifties, electroshock was being routinely used against liberation 
fighters by French soldiers in Algeria, often with the help of psychiatrists. 58 In 
this period, French military leaders conducted seminars at a U.S. military 
"counterinsurgency" school in Fort Bragg, North Carolina, in which they 
trained students in the Algeria techniques. 59 It is also clear, however, that 
Cameron's particular model of using massive doses of shock not just to in- 
flict pain but for the specific goal of erasing structured personalities made an 
impression on the CIA. In 1966, the CIA sent three psychiatrists to Saigon, 
armed with a Page-Russell, the same kind of electroshock machine favored 
by Cameron; it was used so aggressively that it killed several prisoners. Ac- 
cording to McCoy, "In effect, they were testing, under field conditions, 
whether Ewen Cameron's McGill 'de-patterning' techniques could actually 
alter human behavior." 60 

For U.S. intelligence officials, that kind of hands-on approach was rare. 
From the seventies on, the role favored by American agents was that of men- 
tor or trainer— not direct interrogator. Testimony from Central American 
torture survivors in the seventies and eighties is littered with references to 


mysterious English-speaking men walking in and out of cells, proposing 
questions or offering tips. Dianna Ortiz, an American nun who was ab- 
ducted and jailed in Guatemala in 1989, has testified that the men who 
raped and burned her with cigarettes deferred to a man who spoke Spanish 
with a heavy American accent, whom they referred to as their "boss." 61 Jennifer 
Harbury, whose husband was tortured and killed by a Guatemalan officer on 
the CIA payroll, has documented many of these cases in her important book, 
Truth, Torture and the American Way. 62 

Though sanctioned by successive administrations in Washington, the 
U.S. role in these dirty wars had to be covert, for obvious reasons. Torture, 
whether physical or psychological, clearly violates the Geneva Conventions' 
blanket ban on "any form of torture or cruelty," as well as the U.S. Army's 
own Uniform Code of Military Justice barring "cruelty" and "oppression" of 
prisoners. 63 The Kubark manual warns readers on page 2 that its techniques 
carry "the grave risk of later lawsuits," and the 1983 version is even more 
blunt: "Use of force, mental torture, threats, insults, or exposure to unpleas- 
ant and inhumane treatment of any kind as an aid to interrogation is prohib- 
ited by law, both international and domestic." 64 Simply put, what they were 
teaching was illegal, covert by its very nature. If anyone asked, U.S. agents 
were tutoring their developing-world students in modern, professional polic- 
ing methods— they couldn't be responsible for "excesses" that happened 
outside their classes. 

On September 11, 2001, that longtime insistence on plausible deniability 
went out the window. The terrorist attack on the Twin Towers and the Penta- 
gon was a different kind of shock from the ones imagined in the pages of the 
Kubark manual, but its effects were remarkably similar: profound disorienta- 
tion, extreme fear and anxiety, and collective regression. Like the Kubark in- 
terrogator posing as a "father figure," the Bush administration promptly used 
that fear to play the role of the all-protective parent, ready to defend "the 
homeland" and its vulnerable people by any means necessary. The shift in 
U.S. policy encapsulated by Vice President Dick Cheney's infamous state- 
ment about working "the dark side" did not mark an embrace by this admin- 
istration of tactics that would have repelled its more humane predecessors 
(as too many Democrats have claimed, invoking what the historian Garry 
Wills calls the particular American myth of "original sinlessness" 65 ). Rather, 
the significant shift was that what had previously been performed by proxy, 
with enough distance to deny knowledge, would now be performed directly 
and openly defended. 


Despite all the talk of outsourced torture, the Bush administration's real in- 
novation has been its in-sourcing, with prisoners being tortured by U.S. citi- 
zens in U.S.-run prisons or directly transported, through "extraordinary 
rendition/' to third countries on U.S. planes. That is what makes the Bush 
regime different: after the attacks of September 11, it dared to demand the 
right to torture without shame. That left the administration subject to criminal 
prosecution— a problem it dealt with by changing the laws. The chain of 
events is well known: then-secretary of defense Donald Rumsfeld, empowered 
by George W. Bush, decreed that prisoners captured in Afghanistan were not 
covered by the Geneva Conventions because they were "enemy combatants," 
not POWs, a view confirmed by the White House legal counsel at the time, 
Alberto Gonzales (subsequently U.S. attorney general). 66 Next, Rumsfeld ap- 
proved a series of special interrogation practices for use in the War on Terror. 
These included the methods laid out in the CIA manuals: "use of isolation fa- 
cility for up to 30 days," "deprivation of light and auditory stimuli," "the de- 
tainee may also have a hood placed over his head during transportation and 
questioning," "removal of clothing" and "using detainees' individual phobias 
(such as fear of dogs) to induce stress." 67 According to the White House, tor- 
ture was still banned— but now to qualify as torture, the pain inflicted had to 
"be equivalent in intensity to the pain accompanying serious physical injury, 
such as organ failure."* 68 According to these new rules, the U.S. government 
was free to use the methods it had developed in the 1950s under layers of se- 
crecy and deniability— only now it was out in the open, without fear of prose- 
cution. . . . According to these new rules, the U.S. government was free to use 
the methods it had developed in the 1950s under layers of secrecy and 
deniability— only now it was out in the open, without fear of prosecution. So 
in February 2006, the Intelligence Sciences Board, an advisory arm of the 
CIA, published a report written by a veteran Defense Department interroga- 
tor. It stated openly that "a careful reading of the Kubark manual is essential 
for anyone involved in interrogation." 69 

* Under pressure from lawmakers in Congress and the Senate, as well as the Supreme 
Court, the Bush administration was forced to moderate its position somewhat when Con- 
gress approved the Military Commissions Act of 2006. But although the White House used 
the new bill to claim that it had renounced all use of torture, it left huge holes allowing CIA 
agents and contractors to continue to use Kubark-style sensory deprivation and overload, as 
well as other "creative" techniques including simulated drowning ("water-boarding"). Before 
signing the act, Bush attached a "signing statement" asserting his right "to interpret the 
meaning and application of the Geneva Conventions" as he sees fit. The New York Times de- 
scribed this as the "unilateral rewriting of more than 200 years of tradition and law." 


One of the first people to come face-to-face with the new order was the U.S. 
citizen and former gang member Jose Padilla. Arrested in May 2002 at 
Chicago's O'Hare airport, he was accused of intending to build a "dirty bomb." 
Rather than being charged and taken through the court system, Padilla was 
classified as an enemy combatant, which stripped him of all rights. Taken to a 
U.S. Navy prison in Charleston, South Carolina, Padilla says he was injected 
with a drug that he believes was either LSD or PCP and subjected to intense 
sensory deprivation: he was kept in a tiny cell with the windows blacked out 
and forbidden to have a clock or a calendar. Whenever he left the cell he was 
shackled, his eyes were covered with blackout goggles and sound was blocked 
with heavy headphones. Padilla was kept under these conditions for 1,307 days 
and forbidden contact with anyone but his interrogators, who, when they ques- 
tioned him, blasted his starved senses with lights and pounding sounds. 70 

Padilla was granted a court hearing in December 2006, although the 
dirty-bomb allegations for which he had been arrested were dropped. He 
was accused of having terrorist contacts, but there was little he could do to 
defend himself: according to expert testimony, the Cameron-style regression 
techniques had completely succeeded in destroying the adult he once was, 
which is precisely what they were designed to do. "The extended torture vis- 
ited upon Mr. Padilla has left him damaged, both mentally and physically," 
his lawyer told the court. "The government's treatment of Mr. Padilla has 
robbed him of his personhood." A psychiatrist who assessed him concluded 
that he "lacks the capacity to assist in his own defense." 71 The Bush-appointed 
judge insisted that Padilla was fit to stand trial, however. The fact that he 
even had a public trial makes Padilla s case extraordinary. Thousands of 
other prisoners being held in U.S. -run prisons— who, unlike Padilla, are not 
U.S. citizens— have been put through a similar torture regimen, with none 
of the public accountability of a civilian trial. 

Many languish in Guantanamo. Mamdouh Habib, an Australian who was 
incarcerated there, has said that "Guantanamo Bay is an experiment . . . and 
what they experiment in is brainwashing." 72 Indeed, in the testimonies, re- 
ports and photographs that have come out of Guantanamo, it is as if the Allan 
Memorial Institute of the 1950s had been transported to Cuba. When first 
detained, prisoners are put into intense sensory deprivation, with hoods, 
blackout goggles and heavy headphones to block out all sound. They are left 
in isolation cells for months, taken out only to have their senses bombarded 
with barking dogs, strobe lights and endless tape loops of babies crying, music 
blaring and cats meowing. 


For many prisoners, the effects of these techniques have been much the 
same as they were at the Allan in the fifties: total regression. One released 
prisoner, a British citizen, told his lawyers that there is now an entire section 
of the prison, Delta Block, reserved for "at least fifty" detainees who are in 
permanently delusional states. 73 A declassified letter from the FBI to the 
Pentagon described one high-value prisoner who had been "subjected to in- 
tense isolation for over three months" and "was evidencing behavior consis- 
tent with extreme psychological trauma (talking to nonexistent people, 
reporting hearing voices, crouching in a cell covered with a sheet for hours 
on end)." 74 James Yee, a former U.S. Army Muslim chaplain who worked at 
Guantanamo, has described the prisoners on Delta Block as exhibiting the 
classic symptoms of extreme regression. "I'd stop to talk to them, and they 
would respond to me in a childlike voice, talking complete nonsense. Many 
of them would loudly sing childish songs, repeating the song over and over. 
Some would stand on top of their steel bed frames and act out childishly, re- 
minding me of the King of the Mountain game I played with my brothers 
when we were young." The situation worsened markedly in January 2007, 
when 165 prisoners were moved into a new wing of the prison, known as 
Camp Six, where the steel isolation cells allowed for no human contact. 
Sabin Willett, a lawyer who represents several Guantanamo prisoners, 
warned that if the situation continued, "You're going to have an insane asy- 
lum." 75 

Human rights groups point out that Guantanamo, horrifying as it is, is ac- 
tually the best of the U.S. -run offshore interrogation operations, since it is 
open to limited monitoring by the Red Cross and lawyers. Unknown num- 
bers of prisoners have disappeared into the network of so-called black sites 
around the world or been shipped by U.S. agents to foreign-run jails through 
extraordinary rendition. Prisoners who have emerged from these nightmares 
testify to having faced the full arsenal of Cameron-style shock tactics. 

The Italian cleric Hassan Mustafa Osama Nasr was kidnapped off the 
streets of Milan by a group of CIA agents and Italian secret police. "I didn't 
understand anything about what was going on," he later wrote. "They began 
to punch me in the stomach and all over my body. They wrapped my entire 
head and face with wide tape, and cut holes over my nose and face so I could 
breathe." They rushed him to Egypt, where he lived in a cell with no light, 
where "roaches and rats walked across my body" for fourteen months. Nasr 
remained in jail in Egypt until February 2007 but managed to smuggle out 
an eleven-page handwritten letter detailing his abuse. 76 


He wrote that he repeatedly faced torture by electroshock. According to the 
Washington Post account, he was "strapped to an iron rack nicknamed 'the 
Bride' and zapped with electric stun guns" as well as "tied to a wet mattress 
on the floor. While one interrogator sat on a wooden chair perched on the 
prisoner's shoulders, another interrogator would flip a switch, sending jolts of 
electricity into the mattress coils." 77 He also had electroshock applied to his 
testicles, according to Amnesty International. 78 

There is reason to believe that this use of electrical torture on U.S.-captured 
prisoners is not isolated, a fact overlooked in almost all the discussions about 
whether the U.S. is actually practicing torture or merely "creative interroga- 
tion." Jumah al-Dossari, a Guantanamo prisoner who has tried to commit 
suicide more than a dozen times, gave written testimoney to his lawyer that 
while he was in U.S. custody in Kandahar, "the investigator brought a small 
device like a mobile phone but it was an electric shock device. He started 
shocking my face, my back, my limbs and my genitals." 79 And Murat Kur- 
naz, originally from Germany, faced similar treatment in a U.S.-run prison 
in Kandahar. "It was the beginning, so there were absolutely no rules. They 
had the right to do anything. They used to beat us every time. They did use 
electroshocks. They dived my head in the water." 80 

The Failure to Reconstruct 

Near the end of our first meeting, I asked Gail Kastner to tell me more about 
her "electric dreams." She told me that she often dreams of rows of patients 
slipping in and out of drug-induced sleep. "I hear people screaming, moan- 
ing, groaning, people saying no, no, no. I remember what it was like to wake 
up in that room, I was covered in sweat, nauseated, vomiting— and I had a 
very peculiar feeling in the head. Like I had a blob, not a head." Describing 
this, Gail seemed suddenly far away, slumped in her blue chair, her breath 
turning into a wheeze. She lowered her eyelids, and beneath them I could 
see her eyes fluttering rapidly. She put her hand to her right temple and said 
in a voice that sounded thick and drugged, "I'm having a flashback. You 
have to distract me. Tell me about Iraq— tell me how bad it was." 

I racked my brain for a suitable war story for this strange circumstance 
and came up with something relatively benign about life in the Green Zone. 
Gail's face slowly relaxed, and her breathing deepened. Her blue eyes once 
again fixed on mine. "Thank you," she said. "I was having a flashback." 

"I know." 


"How do you know?" 
"Because you told me." 

She leaned over and wrote something down on a scrap of paper. 

After leaving Gail that evening, I kept thinking about what I hadn't said 
when she'd asked me to tell her about Iraq. What I had wanted to tell her but 
couldn't was that she reminded me of Iraq; that I couldn't help feeling that 
what happened to her, a shocked person, and what happened to it, a shocked 
country, were somehow connected, different manifestations of the same ter- 
rifying logic. 

Cameron's theories were based on the idea that shocking his patients into 
a chaotic regressed state would create the preconditions for him to "rebirth" 
healthy model citizens. It's little comfort to Gail, with her fractured spine 
and shattered memories, but in his own writings Cameron envisioned his 
acts of destruction as creation, a gift to his fortunate patients who were, un- 
der his relentless repatterning, going to be born again. 

On this front Cameron was a spectacular failure. No matter how fully he 
regressed his patients, they never absorbed or accepted the endlessly re- 
peated messages on his tapes. Though he was a genius at destroying people, 
he could not remake them. A follow-up study conducted after Cameron left 
the Allan Memorial Institute found that 75 percent of his former patients 
were worse off after treatment than before they were admitted. Of his pa- 
tients who held down full-time jobs before hospitalization, more than half 
were no longer able to, and many, like Gail, suffered from a host of new 
physical and psychological ailments. "Psychic driving" did not work, not 
even a little, and the Allan Memorial Institute eventually banned the prac- 
tice. 81 

The problem, obvious in retrospect, was the premise on which his entire 
theory rested: the idea that before healing can happen, everything that ex- 
isted before needs to be wiped out. Cameron was sure that if he blasted away 
at the habits, patterns and memories of his patients, he would eventually ar- 
rive at that pristine blank slate. But no matter how doggedly he shocked, 
drugged and disoriented, he never got there. The opposite proved true: the 
more he blasted, the more shattered his patients became. Their minds 
weren't "clean"; rather, they were a mess, their memories fractured, their 
trust betrayed. 

Disaster capitalists share this same inability to distinguish between de- 
struction and creation, between hurting and healing. It's a feeling I had fre- 
quently when I was in Iraq, nervously scanning the scarred landscape for the 


next explosion. Fervent believers in the redemptive powers of shock, the ar- 
chitects of the American-British invasion imagined that their use of force 
would be so stunning, so overwhelming, that Iraqis would go into a kind of 
suspended animation, much like the one described in the Kubark manual. 
In that window of opportunity, Iraq's invaders would slip in another set of 
shocks— these ones economic— which would create a model free-market 
democracy on the blank slate that was post-invasion Iraq. 

But there was no blank slate, only rubble and shattered, angry people — 
who, when they resisted, were blasted with more shocks, some of them based 
on those experiments performed on Gail Kastner all those years ago. "We're 
really good at going out and breaking things. But the day I get to spend more 
time here working on construction rather than combat, that will be a very 
good day," General Peter W. Chiarelli, commander of the U.S. Army's First 
Cavalry Division, observed a year and half after the official end of the war. 82 
That day never came. Like Cameron, Iraq's shock doctors can destroy, but 
they can't seem to rebuild. 




Economic technocrats may be able to structure a tax reform here, 
a new social security law there, or a modified exchange rate 
regime somewhere else, but they really never have the luxury of a 
clean state on which to set up, in full flower as it were, their com- 
plete preferred economic policy framework. 
—Arnold Harberger, University of Chicago economics professor, 
1998 1 

There are few academic environments as heavily mythologized as the Uni- 
versity of Chicago's Economics Department in the 1950s, a place intensely 
conscious of itself not just as a school but as a School of Thought It was not 
just training students; it was building and strengthening the Chicago School 
of economics, the brainchild of a coterie of conservative academics whose 
ideas represented a revolutionary bulwark against the dominant "statist" 
thinking of the day. To step through the doors of the Social Science Build- 
ing, under the sign reading "Science Is Measurement," and into the leg- 
endary lunchroom, where students tested their intellectual mettle by daring 
to challenge their titanic professors, was to seek nothing so prosaic as a de- 
gree. It was to enlist in battle. As Gary Becker, the conservative economist 
and Nobel Prize winner, put it, "We were warriors in combat with most of 
the rest of the profession." 2 

Like Ewen Cameron's psychiatric department at McGill in the same period, 
the University of Chicago's Economics Department was in the thrall of an ambi- 
tious and charismatic man on a mission to fundamentally revolutionize his 


profession. That man was Milton Friedman. Though he had many mentors 
and colleagues who believed just as fiercely as he did in ultra laissez-faire, it 
was Friedman's energy that gave the school its revolutionary fervor. "People 
would always ask me, 'Why are you so excited? Are you going out on a date 
with a beautiful woman?' " recalls Becker. "I said, 'No, I'm going to a class in 
economics!' Being a student of Milton's was magic indeed." 3 

Friedman's mission, like Cameron's, rested on a dream of reaching back 
to a state of "natural" health, when all was in balance, before human inter- 
ferences created distorting patterns. Where Cameron dreamed of returning 
the human mind to that pristine state, Friedman dreamed of depatteming 
societies, of returning them to a state of pure capitalism, cleansed of all 
interruptions— government regulations, trade barriers and entrenched inter- 
ests. Also like Cameron, Friedman believed that when the economy is highly 
distorted, the only way to reach that prelapsarian state was to deliberately in- 
flict painful shocks: only "bitter medicine" could clear those distortions and 
bad patterns out of the way. Cameron used electricity to inflict his shocks; 
Friedman's tool of choice was policy— the shock treatment approach he 
urged on bold politicians for countries in distress. Unlike Cameron, how- 
ever, who was able to instantly apply his pet theories on his unwitting pa- 
tients, Friedman would need two decades and several twists and turns of 
history before he too got the chance to put his dreams of radical erasure and 
creation into action in the real world. 

Frank Knight, one of the founders of Chicago School economics, thought 
professors should "inculcate" in their students the belief that each economic 
theory is "a sacred feature of the system," not a debatable hypothesis. 4 The 
core of such sacred Chicago teachings was that the economic forces of sup- 
ply, demand, inflation and unemployment were like the forces of nature, 
fixed and unchanging. In the truly free market imagined in Chicago classes 
and texts, these forces existed in perfect equilibrium, supply communicating 
with demand the way the moon pulls the tides. If economies suffered from 
high inflation, it was, according to Friedman's strict theory of monetarism, in- 
variably because misguided policy makers had allowed too much money to 
enter the system, rather than letting the market find its balance. Just as ecosys- 
tems self-regulate, keeping themselves in balance, the market, left to its own 
devices, would create just the right number of products at precisely the right 
prices, produced by workers at just the right wages to buy those products— an 
Eden of plentiful employment, boundless creativity and zero inflation. 


According to the Harvard sociologist Daniel Bell, this love of an idealized 
system is the defining quality of radical free-market economics. Capitalism is 
envisaged as "a jeweled set of movements" or a "celestial clockwork ... a 
work of art, so compelling that one thinks of the celebrated pictures of 
Apelles who painted a cluster of grapes so realistic that the birds would come 
and pick at them." 5 

The challenge for Friedman and his colleagues was how to prove that a 
real-world market could live up to their rapturous imaginings. Friedman al- 
ways prided himself on approaching economics as a science as hard and rigor- 
ous as physics or chemistry. But hard scientists could point to the behavior of 
the elements to prove their theories. Friedman could not point to any living 
economy that proved that if all "distortions" were stripped away, what would 
be left would be a society in perfect health and bounteous, since no country in 
the world met the criteria for perfect laissez-faire. Unable to test their theories 
in central banks and ministries of trade, Friedman and his colleagues had to 
settle for elaborate and ingenious mathematical equations and computer mod- 
els mapped out in the basement workshops of the social sciences building. 

A love of numbers and systems is what had led Friedman to economics. 
In his autobiography, he says his moment of epiphany came when a high- 
school geometry teacher wrote the Pythagorean theorem on the blackboard 
and then, awed by its elegance, quoted from John Keats's "Ode on a Grecian 
Urn": " 'Beauty is truth, truth beauty/ — that is all / Ye know on earth, and all 
ye need to know." 6 Friedman passed on that same ecstatic love of a beautiful 
all-encompassing system to generations of economics scholars — along with 
a search for simplicity, elegance and rigor. 

Like all fundamentalist faiths, Chicago School economics is, for its true 
believers, a closed loop. The starting premise is that the free market is a per- 
fect scientific system, one in which individuals, acting on their own self- 
interested desires, create the maximum benefits for all. It follows ineluctably 
that if something is wrong within a free-market economy— high inflation or 
soaring unemployment— it has to be because the market is not truly free. 
There must be some interference, some distortion in the system. The 
Chicago solution is always the same: a stricter and more complete applica- 
tion of the fundamentals. 

When Friedman died in 2006, obituary writers struggled to summarize 
the breadth of his legacy. One settled on this statement: "Milton's mantra of 
free markets, free prices, consumer choice and economic liberty is responsible 


for the global prosperity we enjoy today." 7 This is partially true. The nature 
of that global prosperity— who shares in it, who doesn't, where it came 
from — are all highly contested, of course. What is irrefutable is the fact that 
Friedman's free-market rulebook, and his savvy strategies for imposing it, 
have made some people extremely prosperous, winning for them something 
approximating complete freedom— to ignore national borders, to avoid reg- 
ulation and taxation and to amass new wealth. 

This knack for thinking highly profitable thoughts appears to have its 
roots in Friedman's early childhood, when his parents, immigrants from 
Hungary, bought a garment factory in Rahway, New Jersey. The family apart- 
ment was in the same building as the shop floor, which, Friedman wrote, 
"would be termed a sweatshop today." 8 Those were volatile times for sweat- 
shop owners, with Marxists and anarchists organizing immigrant workers 
into unions to demand safety regulations and weekends off— and debating 
the theory of worker ownership at after-shift meetings. As the boss's son, 
Friedman no doubt heard a very different perspective on these debates. In 
the end, his father's factory went under, but in lectures and television ap- 
pearances, Friedman spoke of it often, invoking it as a case study for the ben- 
efits of deregulated capitalism— proof that even the worst, least-regulated 
jobs offer the first rung on the ladder to freedom and prosperity. 

A large part of the appeal of Chicago School economics was that, at a 
time when radical-left ideas about workers' power were gaining ground 
around the world, it provided a way to defend the interests of owners that was 
just as radical and was infused with its own claims to idealism. To hear Fried- 
man tell it, his ideas were not about defending the right of factory owners to 
pay low wages but, rather, all about a quest for the purest possible form of 
"participatory democracy" because in the free market, "each man can vote, 
as it were, for the color of tie he wants." 9 Where leftists promised freedom for 
workers from bosses, citizens from dictatorship, countries from colonialism, 
Friedman promised "individual freedom," a project that elevated atomized 
citizens above any collective enterprise and liberated them to express their 
absolute free will through their consumer choices. "What was particularly 
exciting were the same qualities that made Marxism so appealing to many 
other young people at the time," recalled the economist Don Patinkin, who 
studied at Chicago in the forties— "simplicity together with apparent logical 
completeness; idealism combined with radicalism." 10 The Marxists had their 
workers' Utopia, and the Chicagoans had their entrepreneurs' Utopia, both 
claiming that if they got their way, perfection and balance would follow. 


The question, as always, was how to get to that wondrous place from here. 
The Marxists were clear: revolution — get rid of the current system, replace 
it with socialism. For the Chicagoans, the answer was not as straightforward. 
The United States was already a capitalist country, but as far as they were 
concerned, just barely. In the U.S., and in all supposedly capitalist economies, 
the Chicagoans saw interferences everywhere. To make products more af- 
fordable, politicians fixed prices; to make workers less exploited, they set 
minimum wages; to make sure everyone had access to education, they kept 
it in the hands of the state. These measures often seemed to help people, 
but Friedman and his colleagues were convinced— and they "proved" it 
with their models— that they were actually doing untold harm to the equi- 
librium of the market and the ability of its various signals to communicate 
with each other. The mission of the Chicago School was thus one of 
purification — stripping the market of these interruptions so that the free 
market could sing. 

For this reason, Chicagoans did not see Marxism as their true enemy. The 
real source of the trouble was to be found in the ideas of the Keynesians in 
the United States, the social democrats in Europe and the developmentalists 
in what was then called the Third World. These were believers not in a 
utopia but in a mixed economy, to Chicago eyes an ugly hodgepodge of cap- 
italism for the manufacture and distribution of consumer products, social- 
ism in education, state ownership for essentials like water services, and all 
kinds of laws designed to temper the extremes of capitalism. Like the reli- 
gious fundamentalist who has a grudging respect for fundamentalists of other 
faiths and for avowed atheists but disdains the casual believer, the Chicagoans 
declared war on these mix-and-match economists. What they wanted was 
not a revolution exactly but a capitalist Reformation: a return to uncontami- 
nated capitalism. 

Much of this purism came from Friedrich Hayek, Friedman's own per- 
sonal guru, who also taught at the University of Chicago for a stretch in the 
1950s. The austere Austrian warned that any government involvement in 
the economy would lead society down "the road to serfdom" and had to be ex- 
punged. 11 According to Arnold Harberger, a longtime professor at Chicago, 
"the Austrians," as this clique-within-a-clique was called, were so zealous that 
any state interference was not just wrong, but "evil. . . . It's as if there is a very 
pretty but highly complex picture out there, which is perfectly harmonious 
within itself, you see, and if there's a speck where it isn't supposed to be, 
well, that's just awful ... it is a flaw that mars that beauty." 12 


In 1947, when Friedman first joined with Hayek to form the Mont Pelerin 
Society, a club of free-market economists named for its location in Switzer- 
land, the idea that business should be left alone to govern the world as it 
wished was one barely suitable for polite company. Memories of the market 
crash of 1929 and the Great Depression that followed were still fresh— the 
life savings destroyed overnight, the suicides, the soup kitchens, the refugees. 
The scale of this market-created disaster had led to a surging demand for 
a distinctly hands-on form of government. The Depression did not signal the 
end of capitalism, but it was, as John Maynard Keynes forecast a few years 
earlier, "the end of laissez-faire" —the end of letting the market regulate it- 
self. 13 The 1930s through to the early 1950s was a time of unabashed faire: 
the can-do ethos of the New Deal gave way to the war effort, with public 
works programs launched to create much-needed jobs, and new social pro- 
grams unveiled to prevent growing numbers of people from turning hard left. 
It was a time when compromise between left and right was not a dirty word 
but part of what many saw as a noble mission to prevent a world, as Keynes 
wrote to President Franklin D. Roosevelt in 1933, in which "orthodoxy and 
revolution" are left "to fight it out." 14 John Kenneth Galbraith, heir to 
Keynes's mantle in the U.S., described the prime missions of politicians and 
economists alike as "the avoidance of depression and the prevention of un- 
employment." 15 

The Second World War lent new urgency to the war against poverty. 
Nazism had taken root in Germany at a time when the country was in a dev- 
astating depression, provoked by the punishing reparations imposed after 
the First World War and deepened by the 1929 crash. Keynes had warned 
early on that if the world took a laissez-faire approach to Germany's poverty, 
the blowback would be ferocious: "Vengeance, I dare predict, will not 
limp." 16 Those words went unheeded at the time, but when Europe was re- 
built after the Second World War, the Western powers embraced the princi- 
ple that market economies needed to guarantee enough basic dignity that 
disillusioned citizens would not go looking once again for a more appealing 
ideology, whether fascism or Communism. It was this pragmatic imperative 
that led to the creation of almost everything that we associate today with the 
bygone days of "decent" capitalism — social security in the U.S., public- 
health care in Canada, welfare in Britain, workers' protections in France 
and Germany. 

A similar, more radical mood was on the rise in the developing world, 
usually going under the name developmentalism, or Third World nationalism. 


Developmentalist economists argued that their countries would finally es- 
cape the cycle of poverty only if they pursued an inward-oriented industrial- 
ization strategy instead of relying on the export of natural resources, whose 
prices had been on a declining path, to Europe and North America. They 
advocated regulating or even nationalizing oil, minerals and other key in- 
dustries so that a healthy share of the proceeds fed a government-led devel- 
opment process. 

By the 1950s, the developmentalists, like the Keynesians and social demo- 
crats in rich countries, were able to boast a series of impressive success sto- 
ries. The most advanced laboratory of developmentalism was the southern 
tip of Latin America, known as the Southern Cone: Chile, Argentina, 
Uruguay and parts of Brazil. The epicenter was the United Nations' Eco- 
nomic Commission for Latin America, based in Santiago, Chile, and headed 
by the economist Ratil Prebisch from 1950 to 1963. Prebisch trained teams 
of economists in developmentalist theory and dispatched them to act as pol- 
icy advisers for governments across the continent. Nationalist politicians like 
Argentina's Juan Peron put their ideas into practice with a vengeance, pour- 
ing public money into infrastructure projects such as highways and steel 
plants, giving local businesses generous subsidies to build their new facto- 
ries, churning out cars and washing machines, and keeping out foreign im- 
ports with forbiddingly high tariffs. 

During this dizzying period of expansion, the Southern Cone began to 
look more like Europe and North America than the rest of Latin America or 
other parts of the Third World. The workers in the new factories formed 
powerful unions that negotiated middle-class salaries, and their children 
were sent off to study at newly built public universities. The yawning gap be- 
tween the region's polo-club elite and its peasant masses began to narrow. By 
the 1950s, Argentina had the largest middle class on the continent, and next- 
door Uruguay had a literacy rate of 95 percent and offered free health care 
for all citizens. Developmentalism was so staggeringly successful for a time 
that the Southern Cone of Latin America became a potent symbol for poor 
countries around the world: here was proof that with smart, practical poli- 
cies, aggressively implemented, the class divide between the First and Third 
World could actually be closed. 

All this success for managed economies — in the Keynesian north and the 
developmentalist south — made for dark days at the University of Chicago's 
Economics Department. The Chicagoans' academic archrivals at Harvard, 
Yale and Oxford were being enlisted by presidents and prime ministers to 


help tame the beast of the market; almost no one was interested in Fried- 
man's daring ideas about letting it run even more wildly than before. There 
were, however, a few people left who were keenly interested in Chicago 
School ideas — and they were a powerful few. 

For the heads of U.S. multinational corporations, contending with a dis- 
tinctly less hospitable developing world and with stronger, more demanding 
unions at home, the postwar boom years were unsettling times. The econ- 
omy was growing fast, enormous wealth was being created, but owners and 
shareholders were forced to redistribute a great deal of that wealth through 
corporate taxes and workers' salaries. Everyone was doing well, but with a re- 
turn to the pre-New Deal rules, a few people could have been doing a lot 

The Keynesian revolution against laissez-faire was costing the corporate 
sector dearly. Clearly what was needed to regain lost ground was a counter- 
revolution against Keynesianism, a return to a form of capitalism even less 
regulated than before the Depression. This wasn't a crusade that Wall Street 
itself could lead — not in the current climate. If Friedman's close friend Wal- 
ter Wriston, head of Citibank, had come forward and argued that the mini- 
mum wage and corporate taxes should both be abolished, he naturally 
would have been accused of being a robber baron. And that's where the 
Chicago School came in. It quickly became clear that when Friedman, a 
brilliant mathematician and skilled debater, made those same arguments, 
they took on an entirely different quality. They might be dismissed as wrong- 
headed but they were imbued with an aura of scientific impartiality. The 
enormous benefit of having corporate views funneled through academic, 
or quasi-academic, institutions not only kept the Chicago School flush with 
donations but, in short order, spawned the global network of right-wing 
think tanks that would churn out the counterrevolution's foot soldiers world- 

It all came back to Friedman's single-minded message: everything went wrong 
with the New Deal. That's when so many countries "including my own, got off 
on the wrong track." 17 To get governments back on the right track, Friedman, 
in his first popular book, Capitalism and Freedom, laid out what would be- 
come the global free-market rulebook and, in the U.S., would form the eco- 
nomic agenda of the neoconservative movement. 

First, governments must remove all rules and regulations standing in the 
way of the accumulation of profits. Second, they should sell off any assets 


they own that corporations could be running at a profit. And third, they 
should dramatically cut back funding of social programs. Within the three- 
part formula of deregulation, privatization and cutbacks, Friedman had 
plenty of specifics. Taxes, when they must exist, should be low, and rich and 
poor should be taxed at the same flat rate. Corporations should be free to 
sell their products anywhere in the world, and governments should make 
no effort to protect local industries or local ownership. All prices, including 
the price of labor, should be determined by the market. There should be no 
minimum wage. For privatization, Friedman offered up health care, the 
post office, education, retirement pensions, even national parks. In short, 
and quite unabashedly, he was calling for the breaking of the New Deal — 
that uneasy truce between the state, corporations and labor that had pre- 
vented popular revolt after the Great Depression. Whatever protections 
workers had managed to win, whatever services the state now provided to 
soften the edges of the market, the Chicago School counterrevolution 
wanted them back. 

And it wanted more than that— it wanted to expropriate what workers and 
governments had built during those decades of frenetic public works. The 
assets that Friedman urged government to sell were the end products of the 
years of investment of public money and know-how that had built them and 
made them valuable. As far as Friedman was concerned, all this shared 
wealth should be transferred into private hands, on principle. 

Though always cloaked in the language of math and science, Friedman's 
vision coincided precisely with the interests of large multinationals, which 
by nature hunger for vast new unregulated markets. In the first stage of capi- 
talist expansion, that kind of ravenous growth was provided by colonialism — 
by "discovering" new territories and grabbing land without paying for it, then 
extracting riches from the earth without compensating local populations. 
Friedman's war on the "welfare state" and "big government" held out the 
promise of a new font of rapid riches — only this time, rather than conquer- 
ing new territory, the state itself would be the new frontier, its public services 
and assets auctioned off for far less than they were worth. 

The War against Developmentalism 

In the United States of the 1950s, access to those kinds of riches was still de- 
cades away. Even with a hard-core Republican like Dwight Eisenhower in 
the White House, there was no chance of a radical right turn like the one the 


Chicagoans were suggesting— public services and workers' protections were 
far too popular, and Eisenhower was looking to the next election. Although 
he had little appetite for reversing Keynesianism at home, Eisenhower 
proved eager to take swift and radical action to defeat developmentalism 
abroad. It was a campaign in which the University of Chicago would even- 
tually play a pivotal role. 

When Eisenhower took office in 1953, Iran had a developmental leader 
in Mohammad Mossadegh, who had already nationalized the oil company, 
and Indonesia was in the hands of the increasingly ambitious Achmed 
Sukarno, who was talking about linking up all the nationalist governments of 
the Third World into a superpower on par with the West and the Soviet Bloc. 
Of particular concern to the State Department was the growing success of 
nationalist economics in the Southern Cone of Latin America. At a time 
when large portions of the globe were turning to Stalinism and Maoism, de- 
velopmentalist proposals for "import substitution" were actually quite cen- 
trist. Still, the idea that Latin America deserved its own New Deal had 
powerful enemies. The continent's feudal landowners had been happy with 
the old status quo, which supplied them with steep profits and a limitless 
pool of poor peasants to work in the fields and mines. Now, they were out- 
raged to see their profits being diverted to build up other sectors, their work- 
ers demanding land redistribution, and the government keeping the price of 
their crops artificially low so food could be affordable. American and Euro- 
pean corporations doing business in Latin America began to express similar 
complaints to their governments: their products were being blocked at the 
borders, their workers were demanding higher wages and, most alarmingly, 
there was growing talk that everything from foreign-owned mines to banks 
could be nationalized to finance Latin America's dream of economic inde- 

Under pressure from these corporate interests, a movement took hold in 
American and British foreign policy circles that attempted to pull develop- 
mentalist governments into the binary logic of the Cold War. Don't be 
fooled by the moderate, democratic veneer, these hawks warned: Third 
World nationalism was the first step on the road to totalitarian Communism 
and should be nipped in the bud. Two of the chief proponents of this theory 
were John Foster Dulles, Eisenhower's secretary of state, and his brother 
Allen Dulles, head of the newly created CIA. Before taking public posts, 
both had worked at the legendary New York law firm Sullivan & Cromwell, 


where they represented many of the companies that had the most to lose 
from developmentalism, among them J. P. Morgan & Company, the Inter- 
national Nickel Company, the Cuban Sugar Cane Corporation and the 
United Fruit Company. 18 The results of the Dulleses' ascendancy were im- 
mediate: in 1953 and 1954, the CIA staged its first two coups d'etat, both 
against Third World governments that identified far more with Keynes than 
with Stalin. 

The first was in 1953, when a CIA plot successfully overthrew Mossadegh 
in Iran, replacing him with the brutal shah. The next was the 1954 CIA- 
sponsored coup in Guatemala, done at the direct behest of the United Fruit 
Company. The corporation, which still had the ear of the Dulles brothers 
from their Cromwell days, was indignant that President Jacobo Arbenz 
Guzman had expropriated some of its unused land (with full compensation) 
as part of his project to transform Guatemala, as he put it, "from a backward 
country with a predominantly feudal economy into a modern capitalist 
state"— apparently an unacceptable goal. 19 Soon enough Arbenz was out, 
and United Fruit was back in charge. 

Eradicating developmentalism in the Southern Cone, where it had taken 
far deeper root, was a much greater challenge. Figuring out how to achieve 
that goal was the topic of discussion between two American men as they met 
in Santiago, Chile, in 1953. One was Albion Patterson, director of the U.S. 
International Cooperation Administration in Chile — the agency that would 
later become USAID— and the other was Theodore W. Schultz, chairman 
of the Department of Economics at the University of Chicago. Patterson had 
become increasingly concerned about the maddening influence of Raul 
Prebisch and Latin America's other "pink" economists. "What we need to do 
is change the formation of the men, to influence the education, which is 
very bad " he had stressed to a colleague. 20 This objective coincided with 
Schultz 's own belief that the U.S. government wasn't doing enough to fight 
the intellectual war with Marxism. "The United States must take stock of its 
economic programs abroad ... we want [the poor countries] to work out 
their economic salvation by relating themselves to us and by using our way 
of achieving their economic development," he said. 21 

The two men came up with a plan that would eventually turn Santiago, 
a hotbed of state-centered economics, into its opposite— a laboratory for 
cutting-edge free-market experiments, giving Milton Friedman what he had 
longed for: a country in which to test his cherished theories. The original 


plan was simple: the U.S. government would pay to send Chilean students to 
study economics at what pretty much everyone recognized was the most rab- 
idly anti-"pink" school in the world— the University of Chicago. Schultz and 
his colleagues at the university would also be paid to travel to Santiago to 
conduct research into the Chilean economy and to train students and pro- 
fessors in Chicago School fundamentals. 

What set the plan apart from other U.S. training programs that sponsored 
Latin American students, of which there were many, was its unabashedly 
ideological character. By selecting Chicago to train Chileans— a school 
where the professors agitated for the near-complete dismantling of govern- 
ment with single-minded focus— the U.S. State Department was firing a 
shot across the bow in its war against developmentalism, effectively telling 
Chileans that the U.S. government had decided what ideas their elite stu- 
dents should and should not learn. This was such blatant U.S. intervention 
in Latin American affairs that when Albion Patterson approached the dean 
of the University of Chile, the country's premiere university, and offered him 
a grant to set up the exchange program, the dean turned him down. He said 
he would participate only if his faculty had input into who in the U.S. was 
training his students. Patterson went on to approach the dean of a lesser in- 
stitution, Chile's Catholic University, a much more conservative school with 
no economics department. The dean at the Catholic University jumped at 
the offer, and what became known in Washington and Chicago as "the 
Chile Project" was born. 

"We came here to compete, not to collaborate," said Schultz of the Univer- 
sity of Chicago, explaining why the program would be closed to all Chilean 
students but the few selected. 22 This combative stance was explicit from the 
start: the goal of the Chile Project was to produce ideological warriors who 
would win the battle of ideas against Latin America's "pink" economists. 

Officially launched in 1956, the project saw one hundred Chilean stu- 
dents pursue advanced degrees at the University of Chicago between 1957 
and 1970, their tuition and expenses paid for by U.S. taxpayers and U.S. 
foundations. In 1965, the program was expanded to include students from 
across Latin America, with particularly heavy participation from Argentina, 
Brazil and Mexico. The expansion was funded through a grant from the 
Ford Foundation and led to the creation of the Center for Latin American 
Economic Studies at the University of Chicago. Under the program, there 
were forty to fifty Latin Americans studying graduate-level economics at any 
given time — roughly one-third of the department's total student population. 


In comparable programs at Harvard or MIT, there were just four or five 
Latin Americans. It was a startling achievement: in just a decade, the ultra- 
conservative University of Chicago had become the premier destination for 
Latin Americans wanting to study economics abroad, a fact that would 
shape the course of the region's history for decades to come. 

Indoctrinating the visitors in Chicago School orthodoxy became a press- 
ing institutional priority. The head of the program, and the man in charge of 
making the Latin Americans feel welcome, was Arnold Harberger, a safari- 
suit-wearing economist who spoke fluent Spanish, had married a Chilean 
and described himself as "a seriously dedicated missionary." 23 When the 
Chilean students started arriving, Harberger created a special "Chile work- 
shop" where University of Chicago professors presented their highly ideolog- 
ical diagnosis of what was wrong with the South American country— and 
offered their scientific prescriptions on how to fix it. 

"Suddenly, Chile and its economy became a topic of daily conversation 
in the Department of Economics," recalled Andre Gunder Frank, who 
studied under Friedman in the 1950s and went on to become a world- 
renowned development economist. 24 All of Chile's policies were put under 
the microscope and found wanting: its strong social safety net, its protec- 
tions for national industry, its trade barriers, its controls on prices. Students 
were taught disdain for these attempts to alleviate poverty, and many of 
them devoted their PhD theses to dissecting the follies of Latin American 
developmentalism. 25 When Harberger would return from his frequent trips 
to Santiago in the fifties and sixties, Gunder Frank recalled that he would 
lambaste Santiago, Chile's health and education systems— the best on 
the continent— as "absurd attempts to live beyond its underdeveloped 
means." 26 

Within the Ford Foundation, there were concerns about financing such 
an overtly ideological program. Some pointed out that the only Latin Amer- 
ican speakers invited to address the students in Chicago were alumni of the 
same program. "Although the quality and impact of this endeavor cannot be 
denied, its ideological narrowness constituted a serious deficiency," wrote 
Jeffrey Puryear, a Latin American specialist with Ford, in one of the founda- 
tion's internal reviews. "The interests of developing countries are not well- 
served by exposure to a single point of view." 27 This assessment did not stop 
Ford from continuing to fund the program. 

When the first group of Chileans returned home from Chicago, they 
were "even more Friedmanite than Friedman himself," in the words of 


Mario Zanartu, an economist at Santiago's Catholic University.* 28 Many 
took up posts as economics professors in the Catholic University Economics 
Department, rapidly turning it into their own little Chicago School in the 
middle of Santiago— the same curriculum, the same English-language texts, 
the same unyielding claim to "pure" and "scientific" knowledge. By 1963, 
twelve of the department's thirteen full-time faculty members were gradu- 
ates of the University of Chicago program, and Sergio de Castro, one of the 
first graduates, was appointed faculty chairman. 29 Now Chilean students 
didn't need to travel all the way to the U.S.— hundreds could get a Chicago 
School education without leaving home. 

The students who went through the program, whether in Chicago or its 
franchise operation in Santiago, became known throughout the region as "los 
Chicago Boys." With more funding from USAID, Chile's Chicago Boys be- 
came enthusiastic regional ambassadors for ideas Latin Americans call "neo- 
liberalism," traveling to Argentina and Colombia to set up more University of 
Chicago franchises in order to "expand this knowledge throughout Latin 
America, confronting the ideological positions which prevented freedom and 
perpetuated poverty and backwardness," according to one Chilean graduate. 30 

Juan Gabriel Valdes, Chile's foreign minister in the 1990s, described the 
process of training hundreds of Chilean economists in Chicago School or- 
thodoxy as "a striking example of an organized transfer of ideology from the 
United States to a country within its direct sphere of influence ... the edu- 
cation of these Chileans derived from a specific project designed in the 
1950s to influence the development of Chilean economic thinking." He 
pointed out that "they introduced into Chilean society ideas that were com- 
pletely new, concepts entirely absent from the 'ideas market' " 31 

As a form of intellectual imperialism, it was certainly unabashed. There was, 
however, a problem: it wasn't working. According to a 1957 report from the 
University of Chicago to its funders at the State Department, "the central pur- 
pose of the project" was to train a generation of students "who would become 
the intellectual leaders in economic affairs in Chile." 32 But the Chicago Boys 
weren't leading their countries anywhere — in fact, they were being left behind. 
In the early sixties, the main economic debate in the Southern Cone was 

* Walter Heller, the famed Kennedy-government economist, once mocked the cultishness of 
Friedman's followers by dividing them into categories: "Some are Friedmanly, some Fried- 
manian, some Friedmanesque, some Friedmanic and some Friedmaniacs." 


not about laissez-faire capitalism versus developmentalism but about how 
best to take developmentalism to the next stage. Marxists argued for exten- 
sive nationalization and radical land reforms; centrists argued that the key 
was greater economic cooperation among Latin American countries, with 
the goal of transforming the region into a powerful trading bloc to rival Eu- 
rope and North America. At the polls and on the streets, the Southern Cone 
was surging to the left. 

In 1962, Brazil moved decisively in this direction under the presidency of 
Joao Goulart, an economic nationalist committed to land redistribution, 
higher salaries and a daring plan to force foreign multinationals to reinvest a 
percentage of their profits back into the Brazilian economy rather than spirit- 
ing them out of the country and distributing them to shareholders in New York 
and London. In Argentina, a military government was trying to defeat similar 
demands by banning the party of Juan Peron from running in elections, but 
the move had only radicalized a new generation of young Peronists, many of 
whom were willing to use arms to retake the country. 

It was in Chile— the epicenter of the Chicago experiment— that defeat in 
the battle of ideas was most evident. By Chile's historic 1970 elections, the 
country had moved so far left that all three major political parties were in favor 
of nationalizing the country's largest source of revenue: the copper mines then 
controlled by U.S. mining giants. 53 The Chile Project, in other words, was an 
expensive bust. As ideological warriors waging a peaceful battle of ideas with 
their left-wing foes, the Chicago Boys had failed in their mission. Not only was 
the economic debate continuing to shift leftward, but the Chicago Boys were 
so marginal that they did not even register on the Chilean electoral spectrum. 

It might have ended there, with the Chile Project just a minor historical 
footnote, but something happened to rescue the Chicago Boys from obscu- 
rity: Richard Nixon was elected president of the United States. Nixon "had 
an imaginative, and on the whole effective, foreign policy," Friedman en- 
thused. 34 And nowhere was it more imaginative than in Chile. 

It was Nixon who would give the Chicago Boys and their professors some- 
thing they had long dreamed of: a chance to prove that their capitalist Utopia 
was more than a theory in a basement workshop— a shot at remaking a coun- 
try from scratch. Democracy had been inhospitable to the Chicago Boys in 
Chile; dictatorship would prove an easier fit. 

Salvador Allende's Popular Unity government won Chile's 1970 elections on a 
platform promising to put into government hands large sectors of the economy 


that were being run by foreign and local corporations. Allende was a new breed 
of Latin American revolutionary: like Che Guevara, he was a doctor, but un- 
like Che, he looked the part of the tweedy academic, not the romantic guer- 
rilla. He could deliver a stump speech as fiery as any by Fidel Castro, but he 
was a fierce democrat who believed that socialist change in Chile needed to 
come through the ballot box, not the barrel of a gun. When Nixon heard that 
Allende had been elected president, he famously ordered the CIA director, 
Richard Helms, to "make the economy scream." 35 The election also reverber- 
ated throughout the University of Chicago Economics Department. When Al- 
lende won, Arnold Harberger happened to be in Chile. He wrote a letter home 
to his colleagues describing the event as a "tragedy" and informing them that 
"in rightist circles the idea of a military takeover is also sometimes broached." 36 

Although Allende pledged to negotiate fair terms to compensate compa- 
nies that were losing property and investments, U.S. multinationals feared 
that Allende represented the beginning of a Latin America-wide trend, and 
many were unwilling to accept the prospect of losing what was a growing 
portion of their bottom line. By 1968, 20 percent of total U.S. foreign invest- 
ment was tied up in Latin America, and U.S. firms had 5,436 subsidiaries in 
the region. The profits that these investments were able to produce were 
staggering. Mining companies had invested $1 billion over the previous fifty 
years in Chile's copper mining industry— the largest in the world— but they 
had sent $7.2 billion home. 37 

As soon as Allende won the vote, and before he was even inaugurated, 
corporate America declared war on his administration. The center of activity 
was the Washington-based Ad Hoc Committee on Chile, a group that in- 
cluded the major U.S. mining companies with holdings in Chile, as well as 
the de facto leader of the committee, the International Telephone and Tele- 
graph Company (ITT), which owned 70 percent of Chile's soon-to-be- 
nationalized phone company. Purina, Bank of America and Pfizer 
Chemical also sent delegates at various stages. 

The committee's single purpose was to force Allende to back off his 
nationalizations "by confronting him with economic collapse." 38 They had 
many ideas for how to make Allende feel the pain. According to declassified 
meeting minutes, the companies planned to block U.S. loans to Chile and 
"quietly have large U.S. private banks do the same. Confer with foreign 
banking sources with the same thing in mind. Delay buying from Chile over 
the next six months. Use U.S. copper stockpile instead of buying from Chile. 
Bring about a scarcity of U.S. dollars in Chile." And the list goes on. 39 


Allende appointed his close friend Orlando Letelier to be his ambassador 
to Washington; that gave him the task of negotiating the terms of expropria- 
tion with the same corporations plotting to sabotage the Allende government. 
Letelier, a fun-loving extrovert with a quintessential seventies moustache 
and a devastating singing voice, was much beloved in diplomatic circles. His 
son Francisco's fondest memories are of listening to his father play the guitar 
and belt out folk songs at gatherings of friends in their Washington home. 40 
But even with all Letelier's charm and skill, the negotiations never stood a 
chance of success. 

In March 1972, in the midst of Letelier's tense negotiation with ITT, Jack 
Anderson, a syndicated newspaper columnist, published an explosive series 
of articles based on documents that showed that the telephone company had 
secretly plotted with the CIA and the State Department to block Allende 
from being inaugurated two years earlier. In the face of these allegations, 
and with Allende still in power, the U.S. Senate, controlled by Democrats, 
launched an investigation and uncovered a far-reaching conspiracy in 
which ITT had offered $1 million in bribes to Chilean opposition forces and 
"sought to engage the CIA in a plan covertly to manipulate the outcome of 
the Chilean presidential election." 41 

The Senate report, released in June 1973, also found that when the plan 
failed and Allende took power, ITT moved to a new strategy designed to en- 
sure that he would not "make it through the next six months." Most alarming 
to the Senate was the relationship between ITT executives and the U.S. gov- 
ernment. In testimony and documents, it became clear that ITT was directly 
involved in shaping U.S. policy toward Chile at the highest level. At one 
point, a senior ITT executive wrote to National Security Adviser Henry 
Kissinger and suggested that "without informing President Allende, all U.S. 
aid funds already committed to Chile should be placed in the 'under review' 
status." The company also took the liberty of preparing an eighteen-point 
strategy for the Nixon administration that contained a clear call for a military 
coup: "Get to reliable sources within the Chilean military," it stated 
". . . build up their planned discontent against Allende, thus, bring about ne- 
cessity of his removal." 42 

When grilled by the Senate committee about his brazen attempts to har- 
ness the force of the U.S. government to subvert Chile's constitutional pro- 
cess in order to further ITT's own economic interests, the company's vice 
president, Ned Gerrity, seemed genuinely confused. "What's wrong with tak- 
ing care of No. 1?" he asked. The committee offered a response in its report: 


"'No. 1' should not be allowed an undue role in determining U.S. foreign 
policy." 43 

Yet despite years of relentless American dirty tricks, of which ITT was 
only the most scrutinized example, in 1973 Allende was still in power. Eight 
million dollars in covert spending had failed to weaken his base. In midterm 
parliamentary elections that year, Allende s party actually gained support be- 
yond the number that had first elected it in 1970. Clearly, the desire for a dif- 
ferent economic model had taken deep root in Chile, and support for a 
socialist alternative was growing. For Allende s opponents, who had been 
plotting his overthrow since the day the 1970 election results came in, that 
meant their problems would not be solved by simply getting rid of him — 
someone else would just come along and replace him. A more radical plan 
was needed. 

Lessons in Regime Change: Brazil and Indonesia 

There were two models of "regime change" that Allende s opponents had 
been studying closely as possible approaches. One was in Brazil, the other in 
Indonesia. When Brazil's U.S.-backed junta, led by General Humberto 
Castello Branco, seized power in 1964, the military had a plan not merely to 
reverse Joao Goulart's pro-poor programs but to crack Brazil wide open to for- 
eign investment. At first, the Brazilian generals tried to impose the agenda 
relatively peacefully— there were no obvious shows of brutality, no mass ar- 
rests, and though it was later discovered that some "subversives" had been 
brutally tortured during this period, their numbers were small enough (and 
Brazil so large) that word of their treatment barely escaped the jails. The 
junta also made a point of keeping some remnants of democracy in place, 
including limited press freedoms and freedom of assembly— a so-called gen- 
tlemen's coup. 

In the late sixties, many citizens decided to use those limited freedoms to 
express their anger at Brazil's deepening poverty, for which they blamed the 
junta's pro-business economic program, much of it designed by graduates of 
the University of Chicago. By 1968 the streets were overrun with anti junta 
marches, the largest led by students, and the regime was in serious jeopardy. 
In a desperate bid to hold on to power, the military radically changed tactics: 
democracy was shut down completely, all civil liberties were crushed, tor- 
ture became systematic, and, according to Brazil's later-established truth 
commission, "killings by the state became routine." 44 


Indonesia's 1965 coup followed a very different trajectory. Since the Sec- 
ond World War, the country had been led by President Sukarno, the Hugo 
Chavez of his day (though minus Chavez's appetite for elections). Sukarno 
enraged the rich countries by protecting Indonesia's economy, redistribut- 
ing wealth and throwing out the International Monetary Fund and the 
World Bank, which he accused of being facades for the interests of Western 
multinationals. While Sukarno was a nationalist, not a Communist, he 
worked closely with the Communist Party, which had 3 million active mem- 
bers. The U.S. and British governments were determined to end Sukarno's 
rule, and declassified documents show that the CIA had received high-level 
directions to "liquidate President Sukarno, depending upon the situation 
and available opportunities." 45 

After several false starts, the opportunity came in October 1965, when 
General Suharto, backed by the CIA, began the process of seizing power and 
eradicating the left. The CIA had been quietly compiling a list of the coun- 
try's leading leftists, a document that fell into Suharto's hands, while the Pen- 
tagon helped out by supplying extra weapons and field radios so Indonesian 
forces could communicate in the remotest parts of the archipelago. Suharto 
then sent out his soldiers to hunt down the four to five thousand leftists on 
his "shooting lists," as the CIA referred to them; the U.S. embassy received 
regular reports on their progress. 46 As the information came in, the CIA 
crossed names off their lists until they were satisfied that the Indonesian left 
had been annihilated. One of the people involved in the operation was 
Robert J. Martens, who worked for the U.S. embassy in Jakarta. "It really was 
a big help to the army," he told the journalist Kathy Kadane twenty-five years 
later. "They probably killed a lot of people, and I probably have a lot of blood 
on my hands, but that's not all bad. There's a time when you have to strike 
hard at a decisive moment." 47 

The shooting lists covered the targeted killing; the more indiscriminate 
massacres for which Suharto is infamous were, for the most part, delegated 
to religious students. They were quickly trained by the military and then sent 
into villages on instructions from the chief of the navy to "sweep" the coun- 
tryside of Communists. "With relish " wrote one reporter, "they called out 
their followers, stuck their knives and pistols in their waistbands, swung their 
clubs over their shoulders, and embarked on the assignment for which they 
had long been hoping." 48 In just over a month, at least half a million and 
possibly as many as 1 million people were killed, "massacred by the thou- 
sands," according to Tzme. 49 In East Java, "Travelers from those areas tell of 


small rivers and streams that have been literally clogged with bodies; river 
transportation has at places been impeded." 50 

The Indonesian experience attracted close attention from the individuals 
and institutions plotting the overthrow of Salvador Allende in Washington 
and Santiago. Of interest was not only Suharto's brutality but also the ex- 
traordinary role played by a group of Indonesian economists who had been 
educated at the University of California at Berkeley, known as the Berkeley 
Mafia. Suharto was effective at getting rid of the left, but it was the Berke- 
ley Mafia who prepared the economic blueprint for the country's future. 

The parallels with the Chicago Boys were striking. The Berkeley Mafia 
had studied in the U.S. as part of a program that began in 1956, funded by 
the Ford Foundation. They had also returned home to build a faithful copy 
of a Western-style economics department, theirs at the University of Indone- 
sia's Faculty of Economics. Ford sent American professors to Jakarta to es- 
tablish the school, just as Chicago profs had gone to help set up the new 
economics department in Santiago. "Ford felt it was training the guys who 
would be leading the country when Sukarno got out," John Howard, then di- 
rector of Ford's International Training and Research Program, bluntly ex- 
plained. 51 

Ford-funded students became leaders of the campus groups that partici- 
pated in overthrowing Sukarno, and the Berkeley Mafia worked closely with 
the military in the lead-up to the coup, developing "contingency plans" 
should the government suddenly fall.* 52 These young economists had enor- 
mous influence over General Suharto, who knew nothing of high finance. 
According to Fortune magazine, the Berkeley Mafia recorded economics les- 
sons on audiotapes for Suharto to listen to at home. 53 When they met in per- 
son, "President Suharto did not merely listen, he took notes," one member of 
the group recalled with pride. 54 Another Berkeley grad described the rela- 
tionship in this way: we "presented to the Army leadership— the crucial ele- 
ment in the new order— a 'cookbook' of 'recipes' for dealing with Indonesia's 
serious economic problems. General Suharto as the top Army commander 
not only accepted the cookbook, but also wanted the authors of the recipes 
as his economic advisers." 55 Indeed he did. Suharto packed his cabinet with 

* Not all the U.S. professors sent under the program were comfortable with this role. "I felt 
that the University should not be involved in what essentially was becoming a rebellion 
against the government," said Len Doyle, the Berkeley professor appointed to head Fords In- 
donesian economics program. That point of view got Doyle recalled to California and re- 


members of the Berkeley Mafia, handing them all the key financial posts, in- 
cluding minister of trade and ambassador to Washington. 56 

This economic team, having studied at a less ideological school, were not 
antistate radicals like the Chicago Boys. They believed the government had 
a role to play in managing Indonesia's domestic economy and making sure 
that basics, like rice, were affordable. However, the Berkeley Mafia could not 
have been more hospitable to foreign investors wanting to mine Indonesia's 
immense mineral and oil wealth, described by Richard Nixon as "the great- 
est prize in the Southeast Asian area."* 57 They passed laws allowing foreign 
companies to own 100 percent of these resources, handed out "tax holidays," 
and within two years, Indonesia's natural wealth — copper, nickel, hard- 
wood, rubber and oil— was being divided up among the largest mining and 
energy companies in the world. 

For those plotting the overthrow of Allende just as Suharto's program was 
kicking in, the experiences of Brazil and Indonesia made for a useful study 
in contrasts. The Brazilians had made little use of the power of shock, wait- 
ing years before demonstrating their appetite for brutality. It was a near-fatal 
error, since it gave their opponents the chance to regroup and for some to 
form left-wing guerrilla armies. Although the junta managed to clear the 
streets, the rising opposition forced it to slow its economic plans. 

Suharto, on the other hand, had shown that if massive repression was used 
preemptively, the country would go into a kind of shock and resistance could 
be wiped out before it even took place. His use of terror was so merciless, so 
far beyond even the worst expectations, that a people who only weeks earlier 
had been collectively striving to assert their country's independence were 
now sufficiently terrified that they ceded total control to Suharto and his 
henchmen. Ralph McGehee, a senior CIA operations manager during the 
years of the coup, said Indonesia was a "model operation. . . . You can trace 
back all major, bloody events run from Washington to the way Suharto came 
to power. The success of that meant that it would be repeated, again and 
again." 58 

The other crucial lesson from Indonesia had to do with the pre-coup part- 
nership between Suharto and the Berkeley Mafia. Because they were ready 
to take up top "technocratic" positions in the new government and had al- 
ready converted Suharto to their worldview, the coup did more than just get 

* Interestingly, Arnold Harberger was hired as a consultant to Suharto's finance ministry in 


rid of a nationalist threat; it transformed Indonesia into one of the most wel- 
coming environments for foreign multinationals in the world. 

As momentum began to build toward Allende's ouster, a chilling warning 
began appearing in red paint on the walls of Santiago. It said, "Jakarta is 

Shortly after Allende was elected, his opponents inside Chile began to imi- 
tate the Indonesia approach with eerie precision. The Catholic University, 
home of the Chicago Boys, became ground zero for the creation of what the 
CIA called "a coup climate." 59 Many students joined the fascist Patria y Lib- 
ertad and goose-stepped through the streets in open imitation of Hitler 
Youth. In September 1971, a year into Allende's mandate, the top business 
leaders in Chile held an emergency meeting in the seaside city of Vina del 
Mar to develop a coherent regime-change strategy. According to Orlando 
Saenz, president of the National Association of Manufacturers (generously 
funded by the CIA and many of the same foreign multinationals doing their 
own plotting in Washington), the gathering decided that "Allende's govern- 
ment was incompatible with freedom in Chile and with the existence of pri- 
vate enterprise, and that the only way to avoid the end was to overthrow the 
government." The businessmen formed a "war structure," one part of which 
would liaise with the military; another, according to Saenz, would "prepare 
specific alternative programs to government programs that would systemati- 
cally be passed on to the Armed Forces." 60 

Saenz recruited several key Chicago Boys to design those alternative pro- 
grams and set them up in a new office near the Presidential Palace in Santi- 
ago. 61 The group, led by the Chicago grad Sergio de Castro and by Sergio 
Undurraga, his colleague at the Catholic University, began holding weekly 
secret meetings during which they developed detailed proposals for how to 
radically remake their country along neoliberal lines. 62 According to the sub- 
sequent U.S. Senate investigation, "over 75 percent" of the funding for this 
"opposition research organization" was coming directly from the CIA. 63 

For a time, the coup planning proceeded on two distinct tracks: the mili- 
tary plotted the extermination of Allende and his supporters while the econ- 
omists plotted the extermination of their ideas. As momentum built for a 
violent solution, a dialogue was opened between the two camps, with 
Roberto Kelly, a businessman associated with the CIA-financed newspaper 
El Mercurio, acting as the go-between. Through Kelly, the Chicago Boys 
sent a five-page summary of their economic program to the navy admiral in 


charge. The navy gave the nod, and from then on the Chicago Boys worked 
frantically to have their program ready by the time of the coup. 

Their five-hundred-page bible— a detailed economic program that would 
guide the junta from its earliest days— came to be known in Chile as "The 
Brick." According to a later U.S. Senate Committee, "CIA collaborators 
were involved in preparing an initial overall economic plan which has 
served as the basis for the Junta's most important economic decisions." 64 
Eight of the ten principal authors of "The Brick" had studied economics at 
the University of Chicago. 65 

Although the overthrow of Allende was universally described as a military 
coup, Orlando Letelier, Allende's Washington ambassador, saw it as an 
equal partnership between the army and the economists. "The 'Chicago 
boys/ as they are known in Chile," Letelier wrote, "convinced the generals 
that they were prepared to supplement the brutality, which the military pos- 
sessed, with the intellectual assets it lacked." 66 

Chile's coup, when it finally came, would feature three distinct forms of 
shock, a recipe that would be duplicated in neighboring countries and 
would reemerge, three decades later, in Iraq. The shock of the coup itself 
was immediately followed by two additional forms of shock. One was Milton 
Friedman's capitalist "shock treatment," a technique in which hundreds of 
Latin American economists had by now been trained at the University of 
Chicago and its various franchise institutions. The other was Ewen 
Cameron's shock, drug and sensory deprivation research, now codified as 
torture techniques in the Kubark manual and disseminated through exten- 
sive CIA training programs for Latin American police and military. 

These three forms of shock converged on the bodies of Latin Americans 
and the body politic of the region, creating an unstoppable hurricane of mu- 
tually reinforcing destruction and reconstruction, erasure and creation. The 
shock of the coup prepared the ground for economic shock therapy; the shock 
of the torture chamber terrorized anyone thinking of standing in the way of the 
economic shocks. Out of this live laboratory emerged the first Chicago School 
state, and the first victory in its global counterrevolution. 




The theories of Milton Friedman gave him the Nobel 
Prize; they gave Chile General Pinochet. 

— Eduardo Galeano, Days and Nights of Love and War, 

I don't think I was ever regarded as "evil." 

— Milton Friedman, quoted in The Wall Street Journal, 
July 22, 2006 




For injuries ought to be done all at one time, so that, being tasted 
less, they offend less. 

— Niccolo Machiavelli, The Prince. 1513 1 

If this shock approach were adopted, I believe that it should be 
announced publicly in great detail, to take effect at a very close 
date. The more fully the public is informed, the more will its reac- 
tions facilitate the adjustment. 

—Milton Friedman in a letter to General Augusto Pinochet, April 21 , 
1975 2 

General Augusto Pinochet and his supporters consistently referred to the 
events of September 11, 1973, not as a coup d'etat but as "a war." Santiago 
certainly looked like a war zone: tanks fired as they rolled down the boule- 
vards, and government buildings were under air assault by fighter jets. But 
there was something strange about this war. It had only one side. 

From the start, Pinochet had complete control of the army, navy, marines 
and police. Meanwhile, President Salvador Allende had refused to organize 
his supporters into armed defense leagues, so he had no army of his own. 
The only resistance came from the presidential palace, La Moneda, and the 
rooftops around it, where Allende and his inner circle made a valiant effort 
to defend the seat of democracy. It was hardly a fair fight: though there were 
just thirty-six Allende supporters inside, the military launched twenty-four 
rockets into the palace. 3 


Pinochet, the operation's vain and volatile commander (built like one of 
the tanks he rode in on), clearly wanted the event to be as dramatic and trau- 
matic as possible. Even if the coup was not a war, it was designed to feel like 
one— a Chilean precursor to Shock and Awe. It could scarcely have been 
more shocking. Unlike neighboring Argentina, which had been ruled by six 
military governments in the previous four decades, Chile had no experience 
with this kind of violence; it had enjoyed 160 years of peaceful democratic 
rule, the past 41 uninterrupted. 

Now the presidential palace was in flames, the president's shrouded body- 
was being carried out on a stretcher, and his closest colleagues were lying 
facedown in the street at rifle point.* A few minutes' drive from the presi- 
dential palace, Orlando Letelier, recently returned from Washington to take 
up a new post as Chile's defense minister, had gone to his office that morn- 
ing in the ministry. As soon as he walked through the front door, he was am- 
bushed by twelve soldiers in combat uniform, all pointing their submachine 
guns at him. 4 

In the years leading up to the coup, U.S. trainers, many from the CIA, 
had whipped the Chilean military into an anti-Communist frenzy, persuad- 
ing them that socialists were de facto Russian spies, a force alien to Chilean 
society— a homegrown "enemy within." In fact, it was the military that had 
become the true domestic enemy, ready to turn its weapons on the popula- 
tion it was sworn to protect. 

With Allende dead, his cabinet in captivity and no mass resistance in ev- 
idence, the junta's grand battle was over by mid-afternoon. Letelier and the 
other "VIP" prisoners were eventually taken to freezing Dawson Island in the 
southern Strait of Magellan, Pinochet's approximation of a Siberian work 
camp. Killing and locking up the government was not enough for Chile's 
new junta government, however. The generals knew that their hold on power 
depended on Chileans being truly terrified, as the people had been in In- 
donesia. In the days that followed, roughly 13,500 civilians were arrested, 
loaded onto trucks and imprisoned, according to a declassified CIA report. 5 
Thousands ended up in the two main football stadiums in Santiago, the 
Chile Stadium and the huge National Stadium. Inside the National Sta- 
dium, death replaced football as the public spectacle. Soldiers prowled the 

* Allende was found with his head blown apart. Debates continue over whether he was shot 
by one of the bullets fired into La Moneda or he shot himself rather than give Chileans the 
lasting image of their elected president surrendering to an insurrectionary army. The second 
theory is the more credible. 


bleachers with hooded collaborators who pointed out "subversives"; the ones 
who were selected were hauled off to locker rooms and skyboxes transformed 
into makeshift torture chambers. Hundreds were executed. Lifeless bodies 
started showing up on the side of major highways or floating in murky urban 

To make sure that the terror extended beyond the capital city, Pinochet 
sent his most ruthless commander, General Sergio Arellano Stark, on a heli- 
copter mission to the northern provinces to visit a string of prisons where 
"subversives" were being held. At each city and town, Stark and his roving 
death squad singled out the highest-profile prisoners, as many as twenty-six 
at a time, who were subsequently executed. The trail of blood left behind 
over those four days came to be known as the Caravan of Death. 6 In short or- 
der, the entire country had gotten the message: resistance is deadly. 

Even though Pinochets battle was one-sided, its effects were as real as any 
civil war or foreign invasion: in all, more than 3,200 people were disap- 
peared or executed, at least 80,000 were imprisoned, and 200,000 fled the 
country for political reasons. 7 

The Economic Front 

For the Chicago Boys, September 1 1 was a day of giddy anticipation and 
deadline adrenalin. Sergio de Castro had been working down to the wire 
with his contact in the navy, getting the final sections of "The Brick" ap- 
proved page by page. Now, on the day of the coup, several Chicago Boys 
were camped out at the printing presses of the right-wing El Mercurio news- 
paper. As shots were being fired in the streets outside, they frantically tried to 
get the document printed in time for the junta's first day on the job. Arturo 
Fontaine, one of the newspaper's editors, recalled that the machines "worked 
non-stop to duplicate copies of this long document." And they made it— just 
barely. "Before midday on Wednesday, September 12, 1973, the General Of- 
ficers of the Armed Forces who performed government duties had the Plan 
on their desks." 8 

The proposals in the final document bore a striking resemblance to those 
found in Milton Friedman's Capitalism and Freedom: privatization, deregu- 
lation and cuts to social spending— the free-market trinity. Chile's U.S.- 
trained economists had tried to introduce these ideas peacefully, within the 
confines of a democratic debate, but they had been overwhelmingly rejected. 
Now the Chicago Boys and their plans were back, in a climate distinctly 


more conducive to their radical vision. In this new era, no one besides a 
handful of men in uniform needed to agree with them. Their staunchest po- 
litical opponents were either in jail, dead or fleeing for cover; the spectacle 
of fighter jets and caravans of death was keeping everyone else in line. 

"To us, it was a revolution," said Cristian Larroulet, one of Pinochet's eco- 
nomic aides. 9 It was a fair description. September 11, 1973, was far more 
than the violent end of Allende's peaceful socialist revolution; it was the be- 
ginning of what The Economist would later describe as a "counterrevolu- 
tion"— the first concrete victory in the Chicago School campaign to seize 
back the gains that had been won under developmentalism and Keynesian- 
ism. 10 Unlike Allende's partial revolution, tempered and compromised by 
the push and pull of democracy, this revolt, imposed through brute force, 
was free to go all the way. In the coming years, the same policies laid out in 
"The Brick" would be imposed in dozens of other countries under cover of a 
wide range of crises. But Chile was the counterrevolution's genesis — a gene- 
sis of terror. 

Jose Pinera, an alumnus of the economics department at the Catholic 
University and a self-described Chicago Boy, was doing graduate work at 
Harvard at the time of the coup. On hearing the good news, he returned 
home "to help found a new country, dedicated to liberty, from the ashes of 
the old one." According to Pinera, who would eventually become Pinochet's 
minister of labor and mining, this was "the real revolution ... a radical, 
comprehensive, and sustained move toward free markets." 11 

Before the coup, Augusto Pinochet had a reputation for deference that 
bordered on the obsequious, forever flattering and agreeing with his civilian 
commanders. As a dictator, Pinochet found new facets of his character. He 
took to power with unseemly relish, adopting the airs of a monarch and 
claiming that "destiny" had given him the job. In short order, he staged a 
coup within a coup to unseat the other three military leaders with whom he 
had agreed to share power and named himself Supreme Chief of the Nation 
as well as president. He basked in pomp and ceremony, proof of his right to 
rule, never missing an opportunity to put on his Prussian dress uniform, 
complete with cape. To get around Santiago, he chose a caravan of gold bul- 
letproof Mercedes-Benzes. 12 

Pinochet had a knack for authoritarian rule, but, like Suharto, he knew 
next to nothing about economics. That was a problem because the cam- 
paign of corporate sabotage spearheaded by ITT had done an effective job of 
sending the economy into a tailspin, and Pinochet had a full-fledged crisis 


on his hands. From the start, there was a power struggle within the junta be- 
tween those who simply wanted to reinstate the pre-Allende status quo and 
return quickly to democracy, and the Chicago Boys, who were pushing for a 
head-to-toe free-market makeover that would take years to impose. Pinochet, 
enjoying his new powers, intensely disliked the idea that his destiny was a 
mere cleanup operation— there to "restore order" and then get out. "We are 
not a vacuum cleaner that swept out Marxism to give back power to those 
Mr. Politicians," he would say. 13 It was the Chicago Boys' vision of a total 
country overhaul that appealed to his newly unleashed ambition, and, like 
Suharto with his Berkeley Mafia, he immediately named several Chicago 
grads as senior economic advisers, including Sergio de Castro, the move- 
ment's de facto leader and the main author of "The Brick." He called them 
the technos— the technicians— which appealed to the Chicago pretension 
that fixing an economy was a matter of science, not of subjective human 

Even if Pinochet understood little about inflation and interest rates, the 
technos spoke a language he did understand. Economics for them meant 
forces of nature that needed to be respected and obeyed because "to act 
against nature is counter-productive and self-deceiving," as Pinera explained. 14 
Pinochet agreed: people, he once wrote, must submit to structure because 
"nature shows us basic order and hierarchy are necessary." 15 This mutual 
claim to be taking orders from higher natural laws formed the basis of the 
Pinochet-Chicago alliance. 

For the first year and a half, Pinochet faithfully followed the Chicago 
rules: he privatized some, though not all, state-owned companies (including 
several banks); he allowed cutting-edge new forms of speculative finance; he 
flung open the borders to foreign imports, tearing down the barriers that had 
long protected Chilean manufacturers; and he cut government spending by 
10 percent— except the military, which received a significant increase. 16 He 
also eliminated price controls — a radical move in a country that had been 
regulating the cost of necessities such as bread and cooking oil for decades. 

The Chicago Boys had confidently assured Pinochet that if he suddenly 
withdrew government involvement from these areas all at once, the "natural" 
laws of economics would rediscover their equilibrium, and inflation— which 
they viewed as a kind of economic fever indicating the presence of un- 
healthy organisms in the market— would magically go down. They were mis- 
taken. In 1974, inflation reached 375 percent— the highest rate in the world 
and almost twice the top level under Allende. 17 The cost of basics such as 


bread went through the roof. At the same time, Chileans were being thrown 
out of work because Pinochet s experiment with "free trade" was flooding the 
country with cheap imports. Local businesses were closing, unable to com- 
pete, unemployment hit record levels and hunger became rampant. The 
Chicago School's first laboratory was a debacle. 

Sergio de Castro and the other Chicago Boys argued (in true Chicago 
fashion) that the problem didn't lie with their theory but with the fact that it 
wasn't being applied with sufficient strictness. The economy had failed to 
correct itself and return to harmonious balance because there were still "dis- 
tortions" left over from nearly half a century of government interference. For 
the experiment to work, Pinochet had to strip these distortions away— more 
cuts, more privatization, more speed. 

In that year and a half, many of the country's business elite had had their 
fill of the Chicago Boys' adventures in extreme capitalism. The only people 
benefiting were foreign companies and a small clique of financiers known as 
the "piranhas," who were making a killing on speculation. The nuts-and- 
bolts manufacturers who had strongly supported the coup were getting 
wiped out. Orlando Saenz— the president of the National Association of 
Manufacturers, who had brought the Chicago Boys into the coup plot in the 
first place— declared the results of the experiment "one of the greatest fail- 
ures of our economic history." 18 The manufacturers hadn't wanted Allende's 
socialism but had liked a managed economy just fine. "It is not possible to 
continue with the financial chaos that dominates in Chile," Saenz said. "It is 
necessary to channel into productive investments the millions and millions 
of financial resources that are now being used in wild-cat speculative opera- 
tions before the very eyes of those who don't even have a job." 19 

Their agenda now in grave danger, the Chicago Boys and the piranhas 
(and there was a great deal of overlap between the two) decided it was time 
to call in the big guns. In March 1975, Milton Friedman and Arnold Har- 
berger flew to Santiago at the invitation of a major bank to help save the ex- 

Friedman was greeted by the junta-controlled press as something of a 
rock star, the guru of the new order. Each of his pronouncements made 
headlines, his academic lectures were broadcast on national television and 
he had the most important audience of all: a private meeting with General 

Throughout his stay, Friedman hammered at a single theme: the junta 
was off to a good start, but it needed to embrace the free market with greater 


abandon. In speeches and interviews, he used a term that had never before 
been publicly applied to a real-world economic crisis: he called for "shock 
treatment." He said it was "the only medicine. Absolutely. There is no other. 
There is no other long-term solution." 20 When a Chilean reporter pointed 
out that even Richard Nixon, then president of the U.S., imposed controls to 
temper the free market, Friedman snapped, "I don't approve of them. I be- 
lieve we should not apply them. I am against economic intervention by the 
government, in my own country, as well as in Chile." 21 

After his meeting with Pinochet, Friedman made some personal notes 
about the encounter, which he reproduced decades later in his memoirs. He 
observed that the general "was sympathetically attracted to the idea of a 
shock treatment but was clearly distressed at the possible temporary unem- 
ployment that might be caused." 22 At this point, Pinochet was already notori- 
ous the world over for ordering massacres in football stadiums; that the 
dictator was "distressed" by the human cost of shock therapy might have 
given Friedman pause. Instead, he pressed the point in a follow-up letter in 
which he praised the general's "extremely wise" decisions but urged 
Pinochet to cut government spending much further, "by 25 per cent within 
six months . . . across-the-board," while simultaneously adopting a package 
of pro-business policies moving toward "complete free trade." Friedman pre- 
dicted that the hundreds of thousands of people who would be fired from the 
public sector would quickly get new jobs in the private sector, soon to be 
booming thanks to Pinochet's removal of "as many obstacles as possible that 
now hinder the private market." 23 

Friedman assured the general that if he followed this advice, he would be 
able to take credit for an "economic miracle"; he "could end inflation 
in months" while the unemployment problem would be equally "brief- 
measured in months— and that subsequent recovery would be rapid." 
Pinochet would need to act fast and decisively; Friedman emphasized the 
importance of "shock" repeatedly, using the word three times and underlin- 
ing that "gradualism is not feasible." 24 

Pinochet was converted. In his letter of response, Chile's supreme chief 
expressed "my highest and most respectful regard for you," assuring Fried- 
man that "the Plan is being fully applied at the present time." 25 Immediately 
after Friedman's visit, Pinochet fired his economic minister and handed the 
job to Sergio de Castro, whom he later promoted to finance minister. De 
Castro stacked the government with his fellow Chicago Boys, appointing 
one of them to head the central bank. Orlando Saenz, who had objected to 


the mass layoffs and plant closures, was replaced as head of the Association 
of Manufacturers by someone with a more shock-friendly attitude. "If there 
are industrialists who complain because of this, let them 'go to hell.' I won't 
defend them ," the new director announced. 26 

Freed of the naysayers, Pinochet and de Castro got to work stripping 
away the welfare state to arrive at their pure capitalist utopia. In 1975, they 
cut public spending by 27 percent in one blow— and they kept cutting 
until, by 1980, it was half of what it had been under Allende. 2/ Health and 
education took the heaviest hits. Even The Economist, a free-market cheer- 
leader, called it "an orgy of self-mutilation." 28 De Castro privatized almost 
five hundred state-owned companies and banks, practically giving many of 
them away, since the point was to get them as quickly as possible into their 
rightful place in the economic order. 29 He took no pity on local companies 
and removed even more trade barriers; the result was the loss of 177,000 in- 
dustrial jobs between 1973 and 1983. 50 By the mid-eighties, manufacturing 
as a percentage of the economy dropped to levels last seen during the Sec- 
ond World War. 31 

Shock treatment was an apt description for what Friedman had pre- 
scribed. Pinochet had deliberately sent his country into a deep recession, 
based on the untested theory that the sudden contraction would jolt the 
economy into health. In its logic, it was strikingly similar to that of the psy- 
chiatrists who started mass-prescribing ECT in the 1940s and 1950s, con- 
vinced that deliberately induced grand mal seizures would magically reboot 
their patients' brains. 

The theory of economic shock therapy relies in part on the role of expec- 
tations in feeding an inflationary process. Reining in inflation requires not 
only changing monetary policy but also changing the behavior of con- 
sumers, employers and workers. The role of a sudden, jarring policy shift is 
that it quickly alters expectations, signaling to the public that the rules of 
the game have changed dramatically— prices will not keep rising, nor will 
wages. According to this theory, the faster expectations of inflation are driven 
down, the shorter the painful period of recession and high unemployment 
will be. However, particularly in countries where the political class has lost 
its credibility with the public, only a major, decisive policy shock is said to 
have the power to "teach" the public these harsh lessons.* 

* Some Chicago School, economists claim that the first experiment in shock therapy took place 
in West Germany on June 20, 1948. That's when Finance Minister Ludwig Erhard eliminated 


Causing a recession or a depression is a brutal idea, since it necessarily cre- 
ates mass poverty, which is why no political leader had until this point been 
willing to test the theory. Who wants to be responsible for what Business-Week 
described as a "Dr. Strangelove world of deliberately induced depression"? 32 

Pinochet did. In the first year of Friedman-prescribed shock therapy, Chile s 
economy contracted by 15 percent, and unemployment— only 3 percent un- 
der Allende — reached 20 percent, a rate unheard of in Chile at the time. 33 
The country was certainly convulsing under its "treatments." And contrary to 
Friedman's sunny predictions, the unemployment crisis lasted for years, not 
months. 34 The junta, which had instantly taken to Friedman's illness meta- 
phors, was unapologetic, explaining that "this path was chosen because it is 
the only one that goes directly to the sickness." 35 Friedman concurred. When 
asked by a reporter "whether the social cost of his policies would be excessive," 
he responded, "Silly question." 36 To another reporter he said, "My only con- 
cern is that they push it long enough and hard enough." 37 

Interestingly, the most powerful criticism of shock therapy came from one 
of Friedman's own former students, Andre Gunder Frank. During his time 
at the University of Chicago in the fifties, Gunder Frank— originally from 
Germany— had heard so much about Chile that when he graduated with a 
PhD in economics, he decided to go see for himself the country his profes- 
sors had portrayed as a mismanaged developmentalist dystopia. He liked 
what he saw and ended up teaching at the University of Chile, then serving 
as an economic adviser to the government of Salvador Allende, for whom he 
developed a great respect. As a Chicago Boy in Chile who had defected from 
the school's free-market orthodoxy, Gunder Frank had a unique perspective 
on the country's economic adventure. One year after Friedman prescribed 

most price controls and introduced a new currency. The moves were sudden and without warn- 
ing, a tremendous shock to the German economy, leading to widespread unemployment. But 
that is where the parallels end: Erhard's reforms were restricted to price and monetary policy, 
they were not accompanied by cuts to social programs or by rapid introduction of free trade, 
and many measures were taken to protect citizens from these shocks, including increasing 
wages. Even post-shock, West Germany easily met Friedman's definition of a quasi-socialist 
welfare state: it provided subsidized housing, government pensions, public health care and a 
state-run education system, while the government ran, and subsidized, everything from the 
phone company to aluminum plants. Crediting Erhard with inventing shock therapy makes for 
a palatable narrative, since his experiment took place after West Germany was liberated from 
tyranny. Erhard's shock, however, bears little resemblance to the sweeping transformations 
currently understood as economic shock therapy— that method was pioneered by Friedman 
and Pinochet, in a country that had just lost its liberty. 


maximum shock, he wrote a rage-fueled "Open Letter to Arnold Harberger 
and Milton Friedman" in which he used his Chicago School education "to 
examine how the Chilean patient has responded to your treatment." 38 

He calculated what it meant for a Chilean family to try to survive on what 
Pinochet claimed was a "living wage." Roughly 74 percent of its income 
went simply to buying bread, forcing the family to cut out such "luxury 
items" as milk and bus fare to get to work. By comparison, under Allende, 
bread, milk and bus fare took up 17 percent of a public employee's salary. 39 
Many children weren't getting milk at school either, since one of the junta's 
first moves had been to eliminate the school milk program. As a result of this 
cut compounding the desperation at home, more and more students were 
fainting in class, and many stopped going altogether. 40 Gunder Frank saw a 
direct connection between the brutal economic policies imposed by his for- 
mer classmates and the violence Pinochet had unleashed on the country. 
Friedman's prescriptions were so wrenching, the disaffected Chicago Boy 
wrote, that they could not "be imposed or carried out without the twin ele- 
ments that underlie them all: military force and political terror." 41 

Undeterred, Pinochet's economic team went into more experimental 
territory, introducing Friedman's most vanguard policies: the public school 
system was replaced by vouchers and charter schools, health care became 
pay-as-you-go, and kindergartens and cemeteries were privatized. Most 
radical of all, they privatized Chile's social security system. Jose Pinera, 
who brought in the program, said that he got the idea from reading Capi- 
talism and Freedom.* 2 George W. Bush's administration is usually credited 
with pioneering "the ownership society," but in fact it was Pinochet's gov- 
ernment, thirty years earlier, that first introduced the idea of "a nation of 

Chile was now in bold new territory, and free-market fans the world over, 
accustomed to debating the merits of such policies in purely academic set- 
tings, were paying close attention. "Economics textbooks say that's the way 
the world should work, but where else do they practice it?" marveled the 
U.S. business magazine Barron's.^ In an article headlined "Chile, Lab Test 
for a Theorist," The New York Times noted that "it is not often that a leading 
economist with strong views is given a chance to test specific prescriptions 
for a very sick economy. It is even more unusual when the economist's client 
happens to be a country other than his own." 44 Many came for an up-close 
look at the Chilean laboratory, including Friedrich Hayek himself, who trav- 
eled to Pinochet's Chile several times and in 1981 selected Vina del Mar 


(the city where the coup had been plotted) to hold the regional meeting of 
the Mont Pelerin Society, the brain trust of the counterrevolution. 

The Myth of the Chilean Miracle 

Even three decades later, Chile is still held up by free-market enthusiasts as 
proof that Friedmanism works. When Pinochet died in December 2006 
(one month after Friedman), The New York Times praised him for "trans- 
forming a bankrupt economy into the most prosperous in Latin America " 
while a Washington Post editorial said he had "introduced the free-market 
policies that produced the Chilean economic miracle." 45 The facts behind 
the "Chilean miracle" remain a matter of intense debate. 

Pinochet held power for seventeen years, and during that time he 
changed political direction several times. The country's period of steady 
growth that is held up as proof of its miraculous success did not begin until the 
mid-eighties— a full decade after the Chicago Boys implemented shock ther- 
apy and well after Pinochet was forced to make a radical course correction. 
That's because in 1982, despite its strict adherence to Chicago doctrine, 
Chile's economy crashed: its debt exploded, it faced hyperinflation once 
again and unemployment hit 30 percent— ten times higher than it was un- 
der Allende. 46 The main cause was that the piranhas, the Enron-style finan- 
cial houses that the Chicago Boys had freed from all regulation, had bought 
up the country's assets on borrowed money and run up an enormous debt of 
$14 billion. 47 

The situation was so unstable that Pinochet was forced to do exactly what 
Allende had done: he nationalized many of these companies. 48 In the face of 
the debacle, almost all the Chicago Boys lost their influential government 
posts, including Sergio de Castro. Several other Chicago graduates held 
prominent posts with the piranhas and came under investigation for fraud, 
stripping away the carefully cultivated facade of scientific neutrality so cen- 
tral to the Chicago Boy identity. 

The only thing that protected Chile from complete economic collapse in 
the early eighties was that Pinochet had never privatized Codelco, the state 
copper mine company nationalized by Allende. That one company gener- 
ated 85 percent of Chile's export revenues, which meant that when the fi- 
nancial bubble burst, the state still had a steady source of funds 49 

It's clear that Chile never was the laboratory of "pure" free markets that its 
cheerleaders claimed. Instead, it was a country where a small elite leapt from 


wealthy to super-rich in extremely short order— a highly profitable formula 
bankrolled by debt and heavily subsidized (then bailed out) with public 
funds. When the hype and salesmanship behind the miracle are stripped 
away, Chile under Pinochet and the Chicago Boys was not a capitalist state 
featuring a liberated market but a corporatist one. Corporatism, or "corpora- 
tivism " originally referred to Mussolini's model of a police state run as an al- 
liance of the three major power sources in society— government, businesses 
and trade unions— all collaborating to guarantee order in the name of na- 
tionalism. What Chile pioneered under Pinochet was an evolution of corpo- 
ratism: a mutually supporting alliance between a police state and large 
corporations, joining forces to wage all-out war on the third power sector— 
the workers— thereby drastically increasing the alliance's share of the na- 
tional wealth. 

That war— what many Chileans understandably see as a war of the rich 
against the poor and middle class — is the real story of Chiles economic 
"miracle." By 1988, when the economy had stabilized and was growing rap- 
idly, 45 percent of the population had fallen below the poverty line. 50 The 
richest 10 percent of Chileans, however, had seen their incomes increase by 
83 percent. 51 Even in 2007, Chile remained one of the most unequal soci- 
eties in the world— out of 123 countries in which the United Nations tracks 
inequality, Chile ranked 116th, making it the 8th most unequal country on 
the list. 52 

If that track record qualifies Chile as a miracle for Chicago school econo- 
mists, perhaps shock treatment was never really about jolting the economy 
into health. Perhaps it was meant to do exactly what it did — hoover wealth 
up to the top and shock much of the middle class out of existence. 

That was the way Orlando Letelier, Allende's former defense minister, 
saw it. After spending a year in Pinochet s prisons, Letelier managed to es- 
cape Chile, thanks to an intensive international lobbying campaign. Watch- 
ing from exile the rapid impoverishment of his country, Letelier wrote in 
1976 that "during the last three years several billions of dollars were taken 
from the pockets of wage earners and placed in those of capitalists and 
landowners . . . concentration of wealth is no accident, but a rule; it is not 
the marginal outcome of a difficult situation — as the junta would like the 
world to believe— but the base for a social project; it is not an economic lia- 
bility but a temporary political success." 53 

What Letelier could not know at the time was that Chile under Chicago 
School rule was offering a glimpse of the future of the global economy, a 


pattern that would repeat again and again, from Russia to South Africa to Ar- 
gentina: an urban bubble of frenetic speculation and dubious accounting 
fueling superprofits and frantic consumerism, ringed by the ghostly factories 
and rotting infrastructure of a development past; roughly half the population 
excluded from the economy altogether; out-of-control corruption and crony- 
ism; decimation of nationally owned small and medium-sized businesses; a 
huge transfer of wealth from public to private hands, followed by a huge 
transfer of private debts into public hands. In Chile, if you were outside the 
wealth bubble, the miracle looked like the Great Depression, but inside its 
airtight cocoon the profits flowed so free and fast that the easy wealth made 
possible by shock therapy-style "reforms" have been the crack cocaine of fi- 
nancial markets ever since. And that is why the financial world did not re- 
spond to the obvious contradictions of the Chile experiment by reassessing 
the basic assumptions of laissez-faire. Instead, it reacted with the junkie's 
logic: Where is the next fix? 

The Revolution Spreads, the People Vanish 

For a time, the next fix came from other countries in Latin America's South- 
ern Cone, where the Chicago School counterrevolution quickly spread. 
Brazil was already under the control of a U.S. -supported junta, and several of 
Friedman's Brazilian students held key positions. Friedman traveled to 
Brazil in 1973, at the height of the regime's brutality, and declared the eco- 
nomic experiment "a miracle." 54 In Uruguay the military had staged a coup 
in 1973 and the following year decided to go the Chicago route. Lacking suf- 
ficient numbers of Uruguayans who had graduated from the University of 
Chicago, the generals invited "Arnold Harberger and [economics professor] 
Larry Sjaastad from the University of Chicago and their team, which included 
former Chicago students from Argentina, Chile, and Brazil, to reform 
Uruguay's tax system and commercial policy." 55 The effects on Uruguay's 
previously egalitarian society were immediate: real wages dropped by 28 per- 
cent, and hordes of scavengers appeared on the streets of Montevideo for the 
first time. 56 

Next to join the experiment was Argentina in 1976, when a junta seized 
power from Isabel Peron. That meant that Argentina, Chile, Uruguay and 
Brazil— the countries that had been showcases of developmentalism— were 
now all run by U.S.-backed military governments and were living laborato- 
ries of Chicago School economics. 


According to declassified Brazilian documents just released in March 
2007, weeks before the Argentine generals seized power, they contacted 
Pinochet and the Brazilian junta and "outlined the main steps to be taken by 
the future regime." 57 

Despite this close collaboration, Argentina's military government did not 
go quite as far into neoliberal experimentation as Pinochet had; it did not pri- 
vatize the country's oil reserves or social security, for instance (that would 
come later). However, when it came to attacking the policies and institutions 
that had lifted Argentina's poor into the middle class, the junta faithfully fol- 
lowed Pinochet, thanks in part to the abundance of Argentine economists 
who had gone through the Chicago program. 

Argentina's newly minted Chicago Boys landed key economic posts in 
the junta government— as secretary of finance, president of the central bank 
and research director for the Treasury Department of the Finance Ministry, 
as well as several other lower-level economic posts. 58 But while the Argentine 
Chicago Boys were enthusiastic participants in the military government, the 
top economic job went not to one of them but to Jose Alfredo Martinez de 
Hoz. He was part of the landed gentry that belonged to the Sociedad Rural, 
the cattle-ranchers' association that had long controlled the country's export 
economy. These families, the closest thing to an aristocracy that Argentina 
possessed, had liked the feudal economic order just fine — a time when they 
didn't have to worry about their land being redistributed to peasants or the 
price of meat being lowered to make sure everyone could eat. 

Martinez de Hoz had been president of the Sociedad Rural, as had his fa- 
ther and grandfather before him; he also sat on the boards of several multi- 
national corporations, including Pan American Airways and ITT. When he 
took up his post in the junta government, there was no mistaking the fact 
that the coup represented a revolt of the elites, a counterrevolution against 
forty years of gains by Argentina's workers. 

Martinez de Hoz's first act as minister of the economy was to ban strikes 
and allow employers to fire workers at will. He lifted price controls, sending 
the cost of food soaring. He was also determined to make Argentina once 
again a hospitable place for foreign multinationals. He lifted restrictions on 
foreign ownership and in the first few years sold off hundreds of state com- 
panies. 59 These measures earned him powerful fans in Washington. Declas- 
sified documents show William Rogers, assistant secretary of state for Latin 
America, telling his boss, Henry Kissinger, shortly after the coup that 
"Martinez de Hoz is a good man. We have been in close consultations 


throughout." Kissinger was so impressed that he arranged to have a high- 
profile meeting with Martinez de Hoz when he visited Washington "as a 
symbolic gesture." He also offered to make a couple of calls to help along Ar- 
gentina's economic efforts: "I will call David Rockefeller " Kissinger told the 
junta's foreign minister, a reference to the president of Chase Manhattan 
Bank. "And I will call his brother, the Vice President [of the United States, 
Nelson Rockefeller] " 60 

To attract investment, Argentina took out a thirty-one-page advertising 
supplement in BusinessWeek, produced by the PR giant Burson-Marsteller, 
declaring that "few governments in history have been as encouraging to pri- 
vate investment. . . . We are in a true social revolution, and we seek partners. 
We are unburdening ourselves of statism, and believe firmly in the all- 
important role of the private sector."* 61 

Once again, the human impact was unmistakable: within a year, wages lost 
40 percent of their value, factories closed, poverty spiraled. Before the junta 
took power, Argentina had fewer people living in poverty than France or the 
U.S. — just 9 percent— and an unemployment rate of only 4.2 percent. 62 Now 
the country began to display signs of the underdevelopment thought to have 
been left behind. Poor neighborhoods were without water, and preventable 
diseases ran rampant. 

In Chile, Pinochet had a free hand to use economic policy to eviscerate 
the middle class, thanks to the shocking and terrifying way in which he had 
seized power. Although his fighter jets and firing squads had been enor- 
mously effective at spreading terror, they had turned out to be a public rela- 
tions disaster. Press reports about Pinochet's massacres sparked a worldwide 
outcry, and activists in Europe and North America aggressively lobbied 
their governments not to trade with Chile— a distinctly unfavorable out- 
come for a regime whose reason for existence was to keep the country open 
for business. 

The newly declassified documents from Brazil show that when Ar- 
gentina's generals were preparing their 1976 coup, they wanted "to avoid suf- 
fering an international campaign like the one that has been unleashed 
against Chile." 63 To achieve that goal, less sensational repression tactics were 
needed — lower-profile ones capable of spreading terror but not so visible to the 
prying international press. In Chile, Pinochet soon settled on disappearances. 

* The junta was so eager to auction off the country to investors that it advertised "a 10 per- 
cent discount on the price of Land for ground-breaking within 60 days." 


Rather than openly killing or even arresting their prey, soldiers would snatch 
them, take them to clandestine camps, torture and often kill them, then 
deny any knowledge. Bodies were thrown into mass graves. According to 
Chile's truth commission, established in May 1990, the secret police would 
dispose of some victims by dropping them into the ocean from helicopters 
"after first cutting their stomach open with a knife to keep the bodies from 
floating." 64 In addition to their lower profile, disappearances turned out to be 
an even more effective means of spreading terror than open massacres, so 
destabilizing was the idea that the apparatus of the state could be used to 
make people vanish into thin air. 

By the mid-seventies, disappearances had become the primary enforcement 
tool of the Chicago School juntas throughout the Southern Cone— and 
none embraced the practice more zealously than the generals occupying 
Argentina's presidential palace. By the end of their reign, an estimated thirty 
thousand people had been disappeared. 65 Many of them, like their Chilean 
counterparts, were thrown from planes into the muddy waters of the Rio de 
la Plata. 

The Argentine junta excelled at striking just the right balance between 
public and private horror, carrying out enough of its terror in the open that 
everyone knew what was going on, but simultaneously keeping enough se- 
cret that it could always be denied. In its first days in power, the junta made 
a single dramatic demonstration of its willingness to use lethal force: a man 
was pushed out of a Ford Falcon (a vehicle notorious for its use by the secret 
police), tied to Buenos Aires's most prominent monument, the 67.5-meter- 
high white Obelisk, and machine-gunned in plain view. 

After that, the junta's killings went underground, but they were always pres- 
ent. Disappearances, officially denied, were very public spectacles enlisting 
the silent complicity of entire neighborhoods. When someone was targeted to 
be eliminated, a fleet of military vehicles showed up at that person's home or 
workplace and cordoned off the block, often with a helicopter buzzing over- 
head. In broad daylight and in full view of the neighbors, police or soldiers bat- 
tered down the door and dragged out the victim, who often shouted his or her 
name before disappearing into a waiting Ford Falcon, in the hope that news of 
the event would reach the family. Some "covert" operations were even more 
brazen: police were known to board crowded city buses and drag passengers off 
by their hair; in the city of Santa Fe, a couple was kidnapped right at the altar 
on their wedding day in front of a church filled with people 66 

The public character of terror did not stop with the initial capture. Once in 


custody, prisoners in Argentina were taken to one of more than three hundred 
torture camps across the country. 67 Many of them were located in densely pop- 
ulated residential areas; one of the most notorious was in a former athletic club 
on a busy street in Buenos Aires, another in a schoolhouse in central Bahi'a 
Blanca and yet another in a wing of a working hospital. At these torture cen- 
ters, military vehicles sped in and out at odd hours, screams could be heard 
through the badly insulated walls and strange, body-shaped parcels were spot- 
ted being carried in and out, all silently registered by the nearby residents. 

The regime in Uruguay was similarly brazen: one of its main torture cen- 
ters was a navy barracks abutting Montevideo's boardwalk, an area once fa- 
vored by families for ocean-side strolls and picnics. During the dictatorship, 
the beautiful spot was empty, as the city's residents studiously avoided hear- 
ing the screams. 68 

The Argentine junta was particularly sloppy about disposing of its vic- 
tims. A country walk could end in horror because mass graves were barely 
concealed. Bodies would show up in public garbage bins, missing fingers 
and teeth (much as they do today in Iraq), or they would wash ashore on the 
banks of the Rio de la Plata, sometimes half a dozen at a time, after one of 
the junta's "death flights." On occasion, they even rained down from helicop- 
ters into farmers' fields. 69 

All Argentines were in some way enlisted as witnesses to the erasure of 
their fellow citizens, yet most people claimed not to know what was going 
on. There is a phrase Argentines use to describe the paradox of wide-eyed 
knowing and eyes-closed terror that was the dominant state of mind in those 
years: "We did not know what nobody could deny." 

Since those wanted by the various juntas often took refuge in neighboring 
countries, the regional governments collaborated with each other in the noto- 
rious Operation Condor. Under Condor, the intelligence agencies of the 
Southern Cone shared information about "subversives"— aided by a state-of- 
the-art computer system provided by Washington— and then gave each other's 
agents safe passage to carry out cross-border kidnappings and torture, a system 
eerily resembling the CIA's "extraordinary rendition" network today.* 70 

The juntas also swapped information about the most effective means 

* The Latin American operation was modeled on Hitler's "Night and Fog." In 1941, Hitler de- 
creed that resistance fighters in Nazi-occupied countries would be brought to Germany to 
"vanish in the night and fog." Several high-profile Nazis took refuge in Chile and Argentina, 
and there is some speculation that they may have trained the Southern Cone intelligence 
agencies in these tactics. 


each had found to extract information from their prisoners. Several Chileans 
who had been tortured at Chile Stadium in the days after the coup remarked 
on the unexpected detail that there were Brazilian soldiers in the room offer- 
ing advice on the most scientific uses of pain. 71 

There were countless opportunities for such exchanges in this period, 
many of them running through the United States and involving the CIA. A 
1975 U.S. Senate investigation into U.S. intervention in Chile found that 
the CIA had provided training to Pinochet's military in methods for "con- 
trolling subversion." 72 And U.S. training of Brazilian and Uruguayan police 
in interrogation techniques has been heavily documented. According to 
court testimony quoted in the country's truth commission report, Brazil: 
Never Again, published in 1985, military officers attended formal "torture 
classes" at army police units where they watched slides depicting various ex- 
cruciating methods. During these sessions, prisoners were brought in for 
"practical demonstrations"— brutally tortured while as many as a hundred 
army sergeants looked on and learned. The report states that "one of the first 
people to introduce this practice into Brazil was Dan Mitrione, an American 
police officer. As a police instructor in Belo Horizonte during the early years 
of the Brazilian military regime, Mitrione took beggars off the streets and tor- 
tured them in classrooms so that the local police would learn the various 
ways of creating, in the prisoner, the supreme contradiction between the 
body and the mind." 73 Mitrione then moved on to conduct police training in 
Uruguay, where, in 1970, he was kidnapped and killed by the Tupamaro 
guerrillas— the group of leftist revolutionaries had planned the operation in 
order to to expose Mitrione's involvement in torture training.* According to 
one of his former students, he insisted, like the authors of the CIA manual, 
that effective torture was not sadism but science. "The precise pain in the 
precise place, in the precise amount" was his motto. 74 

The results of this training are unmistakable in all the human rights re- 
ports from the Southern Cone in this sinister period. Again and again they 
testify to the trademark methods codified in the Kubark manual: early morn- 
ing arrests, hooding, intense isolation, drugging, forced nudity, electroshock. 
And everywhere, the terrible legacy of the McGill experiments in deliber- 
ately induced regression. 

Prisoners released from Chile's National Stadium said that bright flood- 
lights were kept on twenty-four hours a day, and the order of meals seemed 

* The episode was the basis for Costa-Gavras's superb 1972 film, State of Siege. 


deliberately out of sequence. 75 Soldiers forced many prisoners to wear blan- 
kets over their heads so they could neither see nor hear properly, a baffling 
practice since all the prisoners knew they were in the stadium. The effect of 
the manipulations, prisoners reported, was that they lost their sense of night 
and day, and the shock and panic triggered by the coup and their subsequent 
arrests were greatly intensified. It was almost as if the stadium had been 
turned into a giant laboratory, and they were the test subjects in some strange 
experiment in sensory manipulation. 

A more faithful copy of the CIA experiments could be seen in Chile's 
Villa Grimaldi prison, which "was known for its 'Chile rooms'— wooden iso- 
lation compartments so small that prisoners could not kneel" or lie down. 76 
Prisoners in Uruguay's Libertad prison were sent to la isla, the island: tiny 
windowless cells in which one bare bulb was illuminated at all times. High- 
value prisoners were kept in absolute isolation for more than a decade. "We 
were beginning to think we were dead, that our cells weren't cells but rather 
graves, that the outside world didn't exist, that the sun was a myth," one of 
these prisoners, Mauricio Rosencof, recalled. He saw the sun for a total of 
eight hours over eleven and a half years. So deprived were his senses during 
this time that he "forgot colors — there were no colors."* 77 

In one of Argentina's largest torture centers, the Navy School of Mechan- 
ics in Buenos Aires, the isolation chamber was called the capucha, the hood. 
Juan Miranda, who spent three months in the capucha, told me about that 
dark place. "They keep you in a blindfold and a hood with your hands and 
legs in chains, lying down on a foam mattress all day long, in the attic of the 
prison. I could not see the other prisoners— I was separated from them with 
plywood. When the guards would bring food, they made me face the wall, 
then they would pull up the hood so I could eat. It was the only time we 
were allowed to sit up; otherwise, we had to lie down all the time." Other Ar- 
gentine prisoners had their senses starved in cells the size of coffins, called 

The only reprieve from isolation was the worse fate of the interrogation 
room. The most ubiquitous technique, used in the torture chambers of all the 
region's military regimes, was electroshock. There were dozens of variations on 
how electrical currents were sent coursing through prisoners' bodies: with live 
wires, with army field telephones, with needles under fingernails, clamped 

* The prison administration at Libertad worked closely with behavioral psychologists to de- 
sign torture techniques tailored to each individual's psychological profile— a method now 
used at Guantanamo Bay. 


with clothespins on gums, nipples, genitals, ears, mouths, in open wounds, 
attached to bodies doused in water to intensify the charge; on bodies strapped 
to tables or to Brazil's iron "dragon chair." Argentina's cattle-owning junta was 
proud of its distinctive contribution— prisoners were shocked on a metal bed, 
called the parrilla (the barbecue), where they were subject to the picana (cat- 
tle prod). 

The exact number of people who went through the Southern Cone's tor- 
ture machinery is impossible to calculate, but it is probably somewhere be- 
tween 100,000 and 1 50,000, tens of thousands of them killed. 78 

A Witness in Difficult Times 

To be a leftist in those years was to be hunted. Those who did not escape to 
exile were in a minute-by-minute struggle to stay one step ahead of the secret 
police— an existence of safe houses, phone codes and false identities. One of 
the people living that life in Argentina was the country's legendary investiga- 
tive journalist Rodolfo Walsh. A gregarious Renaissance man, a writer of 
crime fiction and award-winning short stories, Walsh was also a super sleuth 
able to crack military codes and spy on the spies. His greatest investigative 
triumph took place when he was working as a journalist in Cuba, where he 
managed to intercept and decode a CIA telex that blew the cover of the Bay 
of Pigs invasion. That information is what allowed Castro to prepare for and 
defend against the invasion. 

When Argentina's previous military junta had banned Peronism and stran- 
gled democracy, Walsh decided to join the armed Montonero movement as 
their intelligence expert.* That put him at the very top of the generals' Most 
Wanted list, with every new disappearance bringing fresh fears that informa- 
tion extracted by the picana would lead the police to the safe house he had se- 
cured with his partner, Lilia Ferreyra, in a small village outside Buenos Aires. 

From his vast network of sources, Walsh had been trying to track the junta's 
many crimes. He compiled lists of the dead and disappeared, the locations of 

* The Montoneros were formed as a response to the previous dictatorship. Peronism was 
banned, and Juan Peron, from exile, called on his young supporters to arm themselves and 
fight for a return to democracy. They did, and the Montoneros— though they engaged in 
armed attacks and kidnappings— played a significant part in forcing democratic elections 
with a Peronist candidate in 1973. But when Peron returned to power, he was threatened by 
the Montoneros' popular support and encouraged right-wing death squads to go after them, 
which is why the group— the subject of much controversy— was already significantly weak- 
ened by the time of the 1976 coup. 



mass graves and of secret torture centers. He prided himself on his knowl- 
edge of the enemy, but in 1977 even he was stunned by the furious brutality 
that the Argentine junta had unleashed on its own people. In the first year of 
military rule, dozens of his close friends and colleagues had disappeared in 
the death camps, and his twenty-six-year-old daughter, Vicki, was also dead, 
driving Walsh mad with grief. 

But with Ford Falcons circling, a life of quiet mourning was not available 
to him. Knowing his time was limited, Walsh made a decision about how he 
would mark the upcoming one-year anniversary of junta rule: with the offi- 
cial papers lavishing praise on the generals for having saved the country, he 
would write his own, uncensored, version of the depravity into which his 
country had descended. It would be titled "An Open Letter from a Writer to 
the Military Junta," and it was composed, Walsh wrote, "without hope of be- 
ing listened to, with the certainty of being persecuted, true to the commit- 
ment I took up a long time ago, to bear witness in difficult times." 79 

The letter would be the decisive condemnation of both the methods of 
state terror and the economic system they served. Walsh planned to circulate 
his "Open Letter" the way he had distributed previous communiques from 
the underground: by making ten copies, then posting them from different 
mailboxes to select contacts who would distribute them further. "I want to 
let those fuckers know that I'm still here, still alive and still writing," he told 
Lilia as he sat down at his Olympia typewriter. 80 

The letter begins with an account of the generals' terror campaign, its 
use of "maximum torture, unending and metaphysical," as well as the in- 
volvement of the CIA in training the Argentine police. After listing the 
methods and grave sites in excruciating detail, Walsh abruptly switches 
gears: "These events, which stir the conscience of the civilized world, are 
not, however, the greatest suffering inflicted on the Argentinean people, 
nor the worst violation for human rights which you have committed. It is 
in the economic policy of this government where one discovers not only 
the explanation for the crimes, but a greater atrocity which punishes 
millions of human beings through planned misery. . . . You only have to 
walk around greater Buenos Aires for a few hours to check the speed with 
which such a policy transforms the city into a 'shantytown' of ten million 
people." 81 

The system Walsh was describing was Chicago School neoliberalism, the 
economic model that would sweep the world. As it took deeper root in Ar- 
gentina in the decades to come, it would eventually push more than half the 


population below the poverty line. Walsh saw it not as an accident but the 
careful execution of a plan — "planned misery." 

He signed the letter on March 24, 1977, exactly one year after the coup. 
The next morning, Walsh and Lilia Ferreyra traveled to Buenos Aires. They 
split the bundle of letters between them and dropped them into mailboxes around 
the city. A few hours later, Walsh went to a meeting he had arranged with the 
family of a disappeared colleague. It was a trap: someone had talked under tor- 
ture, and ten armed men were waiting outside the house in ambush, with orders 
to capture Walsh. "Bring that fucking bastard back alive, he's mine," Admiral 
Massera, one of the three junta leaders, had reportedly directed the soldiers. 
Walsh, whose motto was "It isn't a crime to talk; getting arrested is the crime," 
immediately pulled out his gun and began firing. He injured one of the sol- 
diers and drew their fire; he was dead by the time the car arrived at the Navy 
School of Mechanics. Walsh's body was burned and dumped in a river. 82 

The "War on Terror" Cover Story 

The juntas of the Southern Cone made no secret of their revolutionary am- 
bitions to remake their respective societies, but they were savvy enough to 
publicly deny what Walsh was accusing them of: using massive violence in 
order to achieve those economic goals, goals that, in the absence of a system 
of terrorizing the public and eliminating obstacles, would have certainly 
provoked popular revolt. 

To the extent that killings by the state were acknowledged, they were jus- 
tified by the juntas on the grounds that they were fighting a war against dan- 
gerous Marxist terrorists, funded and controlled by the KGB. If the juntas 
used "dirty" tactics, it was because their enemy was monstrous. Using lan- 
guage that sounds eerily familiar today, Admiral Massera called it "a war for 
freedom and against tyranny ... a war against those who favor death and by 
those of us who favor life. . . . We are fighting against nihilists, against agents 
of destruction whose only objective is destruction itself, although they dis- 
guise this with social crusades." 83 

In the run-up to Chile's coup, the CIA bankrolled a massive propaganda 
campaign to paint Salvador Allende as a dictator in disguise, a Machiavel- 
lian schemer who had used constitutional democracy to gain power but was 
on the verge of imposing a Soviet-style police state from which Chileans 
would never escape. In Argentina and Uruguay, the largest left-wing guer- 
rilla groups — the Montoneros and the Tupamaros— were presented as such 


perilous threats to national security that the generals had no other choice but 
to suspend democracy, seize the state for themselves and use whatever 
means were necessary to crush them. 

In every case, the threat was either wildly exaggerated or completely man- 
ufactured by the juntas. Among its many other revelations, the 1975 Senate 
investigation disclosed that the U.S. government's own intelligence reports 
showed that Allende posed no threat to democracy. 84 As for Argentina's 
Montoneros and Uruguay's Tupamaros, they were armed groups with signif- 
icant popular support, able to pull off daredevil attacks on military and cor- 
porate targets. But Uruguay's Tupamaros were completely dismantled by the 
time the military seized absolute power, and Argentina's Montoneros were 
finished within the first six months of a dictatorship that stretched on for 
seven years (which was why Walsh was in hiding). Declassified State De- 
partment documents have proven that Cesar Augusto Guzzetti, the Argen- 
tine junta's foreign minister, told Henry Kissinger on October 7, 1976, that 
"the terrorist organizations have been dismantled"— yet the junta would go 
on to disappear tens of thousands of citizens after that date. 8> 

For many years, the U.S. State Department also presented the "dirty wars" 
in the Southern Cone as pitched battles between the military and dangerous 
guerrillas, struggles that at times got out of hand but were still deserving of 
economic and military aid. There is mounting evidence that in Argentina as 
well as in Chile, Washington knew it was supporting a very different kind of 
military operation. 

In March 2006, the National Security Archive in Washington released 
the newly declassified minutes from a State Department meeting that took 
place just two days after the Argentine junta staged its 1976 coup. At the 
meeting, William Rogers, assistant secretary of state for Latin America, tells 
Kissinger that "we've got to expect a fair amount of repression, probably a 
good deal of blood, in Argentina before too long. I think they're going to 
have to come down very hard not only on the terrorists but on the dissidents 
of trade unions and their parties." 86 

Indeed they did. The vast majority of the victims of the Southern Cone's 
terror apparatus were not members of armed groups but non-violent activists 
working in factories, farms, shantytowns and universities. They were econo- 
mists, artists, psychologists and left-wing party loyalists. They were killed not 
because of their weapons (which most did not have) but because of their be- 
liefs. In the Southern Cone, where contemporary capitalism was born, the 
"War on Terror" was a war against all obstacles to the new order. 




Extermination in Argentina is not spontaneous, it is not by chance, 
it is not irrational: it is the systematic destruction of a "substantial 
part" of the Argentine national group, intended to transform the 
group as such, to redefine its way of being, its social relations, its 
fate, its future. 

—Daniel Feierstein, an Argentine sociologist, 2004 1 

I had just one goal— to stay alive until the next day. . . . But it 
wasn't just to survive, but to survive as me. 

—Mario Villani, survivor of four years in Argentina's torture camps 2 

In 1976, Orlando Letelier was back in Washington, D.C., no longer as an 
ambassador but as an activist with a progressive think tank, the Institute for 
Policy Studies. Haunted by thoughts of the colleagues and friends still facing 
torture in junta camps, Letelier used his newly recovered freedom to expose 
Pinochets crimes and to defend Allende's record against the CIA propa- 
ganda machine. 

The activism was having an effect, and Pinochet faced universal condem- 
nation for his human rights record. What frustrated Letelier, a trained econ- 
omist, was that even as the world gasped in horror at reports of summary 
executions and electroshock in the jails, most were silent in the face of the 
economic shock therapy; or, in the case of the international banks showering 
the junta with loans, downright giddy about Pinochet's embrace of "free- 
market fundamentals." Letelier rejected a frequently articulated notion that 



the junta had two separate, easily compartmentalized projects— one a bold 
experiment in economic transformation, the other an evil system of grisly 
torture and terror. There was only one project, the former ambassador in- 
sisted, in which terror was the central tool of the free-market transformation. 

"The violation of human rights, the system of institutionalized brutality, 
the drastic control and suppression of every form of meaningful dissent is dis- 
cussed (and often condemned) as a phenomenon only indirectly linked, or 
indeed entirely unrelated, to the classical unrestrained Tree market' policies 
that have been enforced by the military junta," Letelier wrote in a searing es- 
say for The Nation. He pointed out that "this particularly convenient con- 
cept of a social system, in which 'economic freedom' and political terror 
coexist without touching each other, allows these financial spokesmen to 
support their concept of 'freedom' while exercising their verbal muscles in 
defense of human rights." 3 

Letelier went so far as to write that Milton Friedman, as "the intellectual 
architect and unofficial adviser for the team of economists now running the 
Chilean economy," shared responsibility for Pinochet's crimes. He dis- 
missed Friedman's defense that lobbying for shock treatment was merely of- 
fering "technical" advice. The "establishment of a free 'private economy' 
and the control of inflation a la Friedman," Letelier argued, could not be 
done peacefully. "The economic plan has had to be enforced, and in the 
Chilean context that could be done only by the killing of thousands, the es- 
tablishment of concentration camps all over the country, the jailing of more 
than 100,000 persons in three years. . . . Regression for the majorities and 
'economic freedom' for small privileged groups are in Chile two sides of 
the same coin." There was, he wrote, "an inner harmony" between the "free 
market" and unlimited terror. 4 

Letelier's controversial article was published at the end of August 1976. 
Less than a month later, on September 21, the forty-four-year-old economist 
was driving to work in downtown Washington, D.C. As he passed through 
the heart of the embassy district, a remote-controlled bomb planted under 
the driver's seat exploded, sending the car flying and blowing off both his 
legs. With his severed foot abandoned on the pavement, Letelier was rushed 
to George Washington Hospital; he was dead on arrival. The former ambas- 
sador had been driving with a twenty-five-year-old American colleague, 
Ronni Moffit, and she also lost her life in the attack. 5 It was Pinochet's most 
outrageous and defiant crime since the coup itself. 

An FBI investigation revealed that the bomb had been the work of 


Michael Townley, a senior member of Pinochet's secret police, later con- 
victed in a U.S federal court for the crime. The assassins had been admitted 
to the country on false passports with the knowledge of the CIA. 6 

When Pinochet died in December 2006 at age ninety-one, he faced multi- 
ple attempts to put him on trial for crimes committed during his rule— from 
murder, kidnapping and torture to corruption and tax evasion. The family of 
Orlando Letelier had been trying for decades to bring Pinochet to trial for 
the bombing in Washington and to open the U.S. files on the incident. But 
the dictator got the last word in death, evading all the trials and issuing a 
posthumous letter in which he defended the coup and the use of "maximum 
rigor" in staving off a "dictatorship of the proletariat. . . . How I wish the Sep. 
11, 1973, military action had not been necessary!" Pinochet wrote. "How I 
wish the Marxist-Leninist ideology had not entered our fatherland!" 7 

Not all the criminals of Latin America's terror years have been so fortu- 
nate. In September 2006, twenty-three years after the end of Argentina's 
military dictatorship, one of the main enforcers of the terror was finally sen- 
tenced to life in prison. The convicted man was Miguel Osvaldo Etchecolatz, 
who had been police commissioner of the province of Buenos Aires during 
the junta years. 

During the historic trial, Jorge Julio Lopez, a key witness, went missing- 
disappeared. Lopez had been disappeared in the seventies, brutally tortured, 
then released — now it was happening all over again. In Argentina, Lopez be- 
came known as the first person to be "double disappeared." 8 As of mid-2007, 
he was still missing, and the police were virtually certain that he had been 
kidnapped as a warning to other would-be witnesses — the same old tactics of 
the terror years. 

The judge on the case, fifty-five-year-old Carlos Rozanski of Argentina's 
federal court, found Etchecolatz guilty of six counts of homicide, six counts 
of unlawful imprisonment and seven cases of torture. When he handed 
down his verdict, he took an extraordinary step. He said that the conviction 
did not do justice to the true nature of the crime and that, in the interest of 
"the construction of collective memory," he needed to add that these were 
"all crimes against humanity committed in the context of the genocide that 
took place in the Republic of Argentina between 1976 and 1983." 9 

With that sentence, the judge played his part in the rewriting of Argen- 
tine history: the killings of leftists in the seventies were not part of a "dirty 
war" in which two sides clashed and various crimes were committed, as had 



been the official story for decades. Nor were the disappeared merely victims 
of mad dictators who were drunk on sadism and their own personal power. 
What had happened was something more scientific, more terrifyingly ra- 
tional. As the judge put it, there had been a "plan of extermination carried 
out by those who ruled the country." 10 

He explained that the killings were part of a system, planned far in ad- 
vance, duplicated in identical fashion across the country, and committed 
with clear intent not of attacking individual persons but of destroying the 
parts of society that those people represented. Genocide is an attempt to 
murder a group, not a collection of individual persons; therefore, argued the 
judge, it was genocide. 11 

Rozanski recognized that his use of the word "genocide" was controver- 
sial, and he wrote a lengthy decision backing up the choice. He acknowl- 
edged that the UN Convention on Genocide defines the crime as an "intent 
to destroy, in whole or in part, a national, ethnical, religious or racial group"; 
the Convention does not include eliminating a group based on its political 
beliefs— as had been the case in Argentina— but Rozanski said he did not 
consider that exclusion to be legally legitimate. 12 Pointing to a little-known 
chapter in UN history, he explained that on December 11, 1946, in direct 
response to the Nazi Holocaust, the UN General Assembly passed a resolu- 
tion by unanimous vote barring acts of genocide "when racial, religious, po- 
litical and other groups have been destroyed, entirely or in part." 13 The 
reason the word "political" had been excised from the Convention two years 
later was that Stalin demanded it. He knew that if destroying a "political 
group" was genocidal, his bloody purges and mass imprisonment of political 
opponents would fit the bill. Stalin had enough support from other leaders 
who also wanted to reserve the right to wipe out their political opponents 
that the word was dropped. 14 

Rozanski wrote that he considered the original UN definition to be the 
more legitimate, since it had not been subject to this self-interested compro- 
mise.* He also made reference to a ruling by a Spanish national court that 
had put one of Argentina's notorious torturers on trial in 1998. That court 
had also ruled that Argentina's junta had committed "the crime of geno- 
cide." It defined the group the junta was trying to wipe out as "those citizens 

* The criminal codes of many countries, including Portugal, Peru and Costa Rica, bar acts of 
genocide, with definitions that clearly include political groupings or "social groups." French 
law is even broader, defining genocide as a plan intended to destroy in whole or in part "a 
group determined by any arbitrary criteria." 


that did not fit the model determined by the repressors to be suitable for the 
new order being established in the country." 15 The following year, in 1999, 
the Spanish judge Baltasar Garzon, famous for issuing an arrest warrant for 
Augusto Pinochet, also argued that Argentina had suffered genocide. He too 
made an attempt to define which group had been targeted for extermina- 
tion. The junta's goal, he wrote, was "to establish a new order, like Hitler 
hoped to achieve in Germany, in which there was no room for certain types 
of people." The people who did not fit the new order were ones "located in 
those sectors that got in the way of the ideal configuration of the new Argen- 
tinean Nation." 16 

There is, of course, no comparison in scale between what happened un- 
der the Nazis, or in Rwanda in 1994, and the crimes of the corporatist dicta- 
torships of Latin America in the seventies. If genocide means a holocaust, 
these crimes do not belong in that category. However, if genocide is under- 
stood as these courts define it, as an attempt to deliberately obliterate the 
groups who were barriers to a political project, then this process can be seen 
not just in Argentina but, to varying degrees of intensity, throughout the re- 
gion that was turned into the Chicago School laboratory. In these countries, 
the people who "got in the way of the ideal" were leftists of all stripes: econ- 
omists, soup kitchen workers, trade unionists, musicians, farm organizers, 
politicians. Members of all these groups were subjected to a clear and delib- 
erate region-wide strategy, coordinated across borders by Operation Condor, 
to uproot and erase the left. 

Since the fall of Communism, free markets and free people have been 
packaged as a single ideology that claims to be humanity's best and only 
defense against repeating a history filled with mass graves, killing fields and 
torture chambers. Yet in the Southern Cone, the first place where the con- 
temporary religion of unfettered free markets escaped from the basement 
workshops of the University of Chicago and was applied in the real world, it 
did not bring democracy; it was predicated on the overthrow of democracy in 
country after country. And it did not bring peace but required the systematic 
murder of tens of thousands and the torture of between 100,000 and 1 50,000 

There was, as Letelier wrote, an "inner harmony" between the drive to 
cleanse sectors of society and the ideology at the heart of the project. The 
Chicago Boys and their professors, who provided advice and took up top 
posts in the military regimes of the Southern Cone, believed in a form of 


capitalism that is purist by its very nature. Theirs is a system based entirely 
on a belief in "balance" and "order" and the need to be free of interferences 
and "distortions" in order to succeed. Because of these traits, a regime com- 
mitted to the faithful application of this ideal cannot accept the presence of 
competing or tempering worldviews. In order for the ideal to be achieved, it 
requires a monopoly on ideology; otherwise, according to the central theory, 
the economic signals become distorted and the entire system is thrown out 
of balance. 

The Chicago Boys could scarcely have selected a part of the world less 
hospitable to this absolutist experiment than the Southern Cone of Latin 
America in the 1970s. The extraordinary rise of developmentalism meant 
that the area was a cacophony of precisely the policies that the Chicago 
School considered distortions or "uneconomic ideas." More important, it 
was teeming with popular and intellectual movements that had emerged in 
direct opposition to laissez-faire capitalism. Such views were not marginal 
but typical of the majority of citizens, as reflected in election after election 
in country after country. A Chicago School transformation was about as 
likely to be warmly received in the Southern Cone as a proletarian revolu- 
tion in Beverly Hills. 

Before the terror campaign descended on Argentina, Rodolfo Walsh had 
written, "Nothing can stop us, neither jail nor death. Because you can't jail 
or kill a whole people and because the vast majority of Argentinians . . . 
know that only the people will save the people." 17 Salvador Allende, as he 
watched the tanks roll in to lay siege to the presidential palace, had made 
one final radio address suffused with this same defiance: "I am certain that 
the seed we planted in the worthy consciousness of thousands and thousands 
of Chileans cannot be definitively uprooted," he said, his last public words. 
"They have the strength; they can subjugate us, but they cannot halt social 
processes by either crime or force. History is ours, and the people make it." 18 

The junta commanders of the region and their economic accomplices 
were well acquainted with those truths. A veteran of several Argentine mili- 
tary coups explained the thinking inside the military: "In 1955 we believed 
that the problem was [Juan] Peron, so we took him out, but by 1976 we al- 
ready knew that the problem was the working class." 19 It was the same across 
the region: the problem was large and deep. That realization meant that if 
the neoliberal revolution was going to succeed, the juntas needed to do what 
Allende had claimed was impossible — definitively uproot the seed that was 
sown during Latin America s leftward surge. In its Declaration of Principles, 


issued after the coup, the Pinochet dictatorship described its mission as a 
"prolonged and profound operation to change Chilean mentality," an echo of 
the statement twenty years earlier by USAID's Albion Patterson, godfather 
of the Chile Project: "What we need to do is change the formation of the 
men." 20 

But how to do that? The seed that Allende referred to wasn't a single idea 
or even a group of political parties and trade unions. By the sixties and early 
seventies in Latin America, the left was the dominant mass culture — it was 
the poetry of Pablo Neruda, the folk music of Victor Jara and Mercedes Sosa, 
the liberation theology of the Third World Priests, the emancipatory theater 
of Augusto Boal, the radical pedagogy of Paulo Freire, the revolutionary jour- 
nalism of Eduardo Galeano and Walsh himself. It was legendary heroes and 
martyrs of past and recent history from Jose Gervasio Artigas to Simon Boli- 
var to Che Guevara. When the juntas set out to defy Allende's prophecy and 
pull up socialism by its roots, it was a declaration of war against this entire 

The imperative was reflected in the dominant metaphors used by the 
military regimes in Brazil, Chile, Uruguay and Argentina: those fascist 
standbys of cleaning, scrubbing, uprooting and curing. In Brazil, the 
junta's roundups of leftists were code-named Operagao Limpeza, Opera- 
tion Cleanup. On the day of the coup, Pinochet referred to Allende and 
his cabinet as "that filth that was going to ruin the country." 21 One month 
later he pledged to "extirpate the root of evil from Chile," to bring about a 
"moral cleansing" of the nation, "purified of vices" — an echo of the Third 
Reich author Alfred Rosenberg's call for "a merciless cleansing with an 
iron broom." 22 

Cleansing Cultures 

In Chile, Argentina and Uruguay, the juntas staged massive ideological 
cleanup operations, burning books by Freud, Marx and Neruda, closing 
hundreds of newspapers and magazines, occupying universities, banning 
strikes and political meetings. 

Some of the most vicious attacks were reserved for the "pink" economists 
whom the Chicago Boys could not defeat before the coups. At the University 
of Chile, rival to the Chicago Boys' home base, the Catholic University, 
hundreds of professors were fired for "inobservance of moral duties" (includ- 
ing Andre Gunder Frank, the dissident Chicagoan who wrote angry letters 


home to his former professors). 23 During the coup, Gunder Frank reported 
that "six students were shot on sight in the main entrance to the School of 
Economics to offer an object lesson to the remainder" 24 When the junta 
seized power in Argentina, soldiers marched into the University of the South 
in Bahia Blanca and imprisoned seventeen academics on charges of "sub- 
versive instruction"; once again, most were from the economics depart- 
ment. 25 "It is necessary to destroy the sources which feed, form and 
indoctrinate the subversive delinquent," one of the generals announced at a 
press conference. 26 A total of eight thousand "ideologically suspect" leftist 
educators were purged as part of Operation Clarity. 27 In high schools, they 
banned group presentations — a sign of a latent collective spirit, dangerous to 
"individual freedom." 28 

In Santiago, the legendary left-wing folk singer Victor Jara was among 
those taken to the Chile Stadium. His treatment was the embodiment of the 
furious determination to silence a culture. First the soldiers broke both his 
hands so he could not play the guitar, then they shot him forty-four times, 
according to Chile's truth and reconciliation commission. 29 To make sure he 
could not inspire from beyond the grave, the regime ordered his master 
recordings destroyed. Mercedes Sosa, a fellow musician, was forced into ex- 
ile from Argentina, the revolutionary dramatist Augusto Boal was tortured 
and exiled from Brazil, Eduardo Galeano was driven from Uruguay and 
Walsh was murdered in the streets of Buenos Aires. A culture was being de- 
liberately exterminated. 

Meanwhile, another sanitized, purified culture was replacing it. At the 
start of the dictatorships in Chile, Argentina and Uruguay, the only public 
gatherings permitted were shows of military strength and football matches. 
In Chile, wearing slacks was enough to get you arrested if you were a 
woman, long hair if you were a man. "All over the Republic a thorough 
cleansing is under way," declared an editorial in a junta-controlled Argen- 
tine newspaper. It called for a mass scrubbing of leftist graffiti: "Soon 
enough the surfaces will shine through, released from that nightmare by the 
action of soap and water." 30 

In Chile, Pinochet was determined to break his people's habit of taking 
to the streets. The tiniest gatherings were dispersed with water cannons, 
Pinochet's favorite crowd-control weapon. The junta had hundreds of 
them, small enough to drive onto sidewalks and douse cliques of school- 
children handing out leaflets; even funeral processions, when the mourn- 
ing got too rowdy, were brutally repressed. Nicknamed guanacos, after a 


llama known for its habit of spitting, the ubiquitous cannons cleared away 
people as if they were human garbage, leaving the streets glistening, clean 
and empty. 

Shortly after the coup, the Chilean junta issued an edict urging citizens 
to "contribute to cleansing your homeland" by reporting foreign "extrem- 
ists" and "fanaticized Chileans." 31 

Who Was Killed— and Why 

The majority of the people swept up in the raids were not "terrorists," as the 
rhetoric claimed, but rather the people whom the juntas had identified as 
posing the most serious barriers to their economic program. Some were ac- 
tual opponents, but many were simply seen as representing values contrary 
to the revolution's. 

The systematic nature of this cleansing campaign is clearly corroborated 
by matching the dates and times of the disappearances documented in hu- 
man rights and truth commission reports. In Brazil, the junta did not begin 
mass repression until the late sixties, but there was one exception: as soon as 
the coup was launched, soldiers rounded up the leadership of trade unions 
active in the factories and on the large ranches. According to Brasil: Nunca 
Mais (Never Again), they were sent to jail, where many faced torture, "for the 
simple reason that they were inspired by a political philosophy opposed by 
the authorities." This truth commission report, based on the military's own 
court records, notes that the General Workers Command (CGT), the main 
coalition of trade unions, appears in the junta's court proceedings "as an om- 
nipresent demon to be exorcised." The report bluntly concludes that the rea- 
son "the authorities who took over in 1964 were especially careful to 'clean 
out' this sector" is that they "feared the spread of . . . resistance from the la- 
bor unions to their economic programs, which were based on tightening 
salaries and denationalizing the economy." 32 

In both Chile and Argentina, the military governments used the initial 
chaos of the coup to launch vicious attacks on the trade union movement. 
These operations were clearly planned well in advance, as the systematic 
raids began on the day of the coup itself. In Chile, while all eyes were on the 
besieged presidential palace, other battalions were dispatched to "factories in 
what were known as the 'industrial belts,' where troops carried out raids and 
arrested people. During the next few days," Chile's truth and reconciliation 
report notes, several more factories were raided, "leading to massive arrests of 



people, some of whom were later killed or disappeared." 33 In 1976, 80 per- 
cent of Chile's political prisoners were workers and peasants. 34 

Argentina's truth commission report, Nunca Mas (Never Again), docu- 
ments a parallel surgical strike against trade unions: "We notice that a large 
proportion of the operations [against workers] were carried out on the day of 
the coup itself, or immediately after." 35 Amid the list of attacks on factories, 
one testimony is particularly revealing about how "terrorism" was used as a 
smoke screen to go after non-violent worker activists. Graciela Geuna, a po- 
litical prisoner in the torture camp known as La Perla, described how the sol- 
diers guarding her became agitated by an impending strike at a power plant. 
The strike was to be "an important example in the resistance to the military 
dictatorship," and the junta did not want it to happen. So, Geuna recalled, 
the "soldiers in the unit decided to make it illegal or, as they said, to 'Mon- 
tonerize' it" (the Montoneros being the guerrilla group the army had already 
effectively broken). The strikers had nothing to do with the Montoneros, but 
that didn't matter. The "soldiers at La Perla themselves printed leaflets they 
signed 'Montoneros' — leaflets calling on the power workers to strike." The 
leaflets then became the "proof" needed to kidnap and kill the union lead- 
ership. 36 

Corporate-Sponsored Torture 

Attacks on union leaders were often carried out in close coordination with 
the owners of the workplaces, and court cases filed in recent years provide 
some of the best-documented examples of direct involvement by local sub- 
sidiaries of foreign multinationals. 

In the years prior to the coup in Argentina, the rise of left-wing militancy 
had affected foreign companies both economically and personally; between 
1972 and 1976, five executives from the auto company Fiat were assassi- 
nated. 37 The fortunes of such companies changed dramatically when the 
junta took power and implemented Chicago School policies; now they 
could flood the local market with imports, pay lower wages, lay workers off at 
will and send their profits home unhindered by regulations. 

Several multinationals effusively expressed their gratitude. On the first 
new year under military rule in Argentina, Ford Motor Company took out a 
celebratory newspaper advertisement openly aligning itself with the regime: 
"1976: Once again, Argentina finds its way. 1977: New Year of faith and 
hope for all Argentines of good will. Ford Motor of Argentina and its people 


commit themselves to the struggle to bring about the great destiny of the Fa- 
therland." 38 Foreign corporations did more than thank the juntas for their 
fine work; some were active participants in the terror campaigns. In Brazil, 
several multinationals banded together and financed their own privatized 
torture squads. In mid-1969, just as the junta entered its most brutal phase, 
an extralegal police force was launched called Operation Bandeirantes, 
known as OBAN. Staffed with military officers, OBAN was funded, accord- 
ing to Brazil: Never Again, "by contributions from various multinational cor- 
porations, including Ford and General Motors." Because it was outside 
official military and police structures, OBAN enjoyed "flexibility and im- 
punity with regard to interrogation methods," the report states, and quickly 
gained a reputation for unparalleled sadism. 39 

It was in Argentina, however, that the involvement of Ford's local sub- 
sidiary with the terror apparatus was most overt. The company supplied cars 
to the military, and the green Ford Falcon sedan was the vehicle used for 
thousands of kidnappings and disappearances. The Argentine psychologist 
and playwright Eduardo Pavlovsky described the car as "the symbolic expres- 
sion of terror. A death-mobile." 40 

While Ford supplied the junta with cars, the junta provided Ford with a 
service of its own — ridding the assembly lines of troublesome trade 
unionists. Before the coup, Ford had been forced to make significant con- 
cessions to its workers: one hour off for lunch instead of twenty minutes, and 
1 percent of the sale of each car to go to social service programs. All that 
changed abruptly on the day of the coup, when the counterrevolution be- 
gan. The Ford factory in suburban Buenos Aires was turned into an armed 
camp; in the weeks that followed, it was swarming with military vehicles, in- 
cluding tanks and helicopters buzzing overhead. Workers have testified to 
the presence of a battalion of one hundred soldiers permanently stationed at 
the factory. 41 "It looked like we were at war in Ford. And it was all directed at 
us, the workers," recalled Pedro Troiani, one of the union delegates. 42 

Soldiers prowled the facility, grabbing and hooding the most active union 
members, helpfully pointed out by the factory foreman. Troiani was among 
those pulled off the assembly line. He recalled that "before detaining me, 
they walked me around the factory, they did it right out in the open so that the 
people would see: Ford used this to eliminate unionism in the factory." 43 
Most startling was what happened next: rather than being rushed off to a 
nearby prison, Troiani and others say soldiers took them to a detention facil- 
ity that had been set up inside the factory gates. In their place of work, where 


they had been negotiating contracts just days before, workers were beaten, 
kicked and, in two cases, electroshocked. 44 They were then taken to outside 
prisons where the torture continued for weeks and, in some cases, months. 45 
According to the workers' lawyers, at least twenty-five Ford union reps were 
kidnapped in this period, half of them detained on the company grounds in 
a facility that human rights groups in Argentina are lobbying to have placed 
on an official list of former clandestine detention facilities. 46 

In 2002, federal prosecutors filed a criminal complaint against Ford Ar- 
gentina on behalf of Troiani and fourteen other workers, alleging that the 
company is legally responsible for the repression that took place on its prop- 
erty. "Ford [Argentina] and its executives colluded in the kidnapping of its 
own workers, and I think they should be held responsible for that," says 
Troiani 47 Mercedes-Benz (a subsidiary of DaimlerChrysler) is facing a simi- 
lar investigation stemming from allegations that the company collaborated 
with the military during the 1970s to purge one of its plants of union leaders, 
allegedly giving names and addresses of sixteen workers who were later dis- 
appeared, fourteen of them permanently 48 

According to the Latin American historian Karen Robert, by the end of 
the dictatorship, "virtually all the shop-floor delegates had been disappeared 
from the country's biggest firms . . . such as Mercedes-Benz, Chrysler and 
Fiat Concord." 49 Both Ford and Mercedes-Benz deny that their executives 
played any role in the repression. The cases are ongoing. 

It wasn't only unionists who faced preemptive attack— it was anyone who 
represented a vision of society built on values other than pure profit. Particu- 
larly brutal throughout the region were the attacks on farmers who had been 
involved in the struggle for land reform. Leaders of the Argentine Agrarian 
Leagues— who had been spreading incendiary ideas about the right of peas- 
ants to own land— were hunted down and tortured, often out in the fields 
they worked, in full view of the community. Soldiers used truck batteries to 
power their picanas, turning the ubiquitous farm implement against the 
farmers themselves. Meanwhile, the junta's economic policies were a wind- 
fall for the landowners and cattle ranchers. In Argentina, Martinez de Hoz 
had deregulated the price of meat, and the cost was up more than 700 per- 
cent, leading to record profits. 50 

In the slums, the targets of the preemptive strikes were community workers, 
many church-based, who organized the poorest sectors of society to demand 
health care, public housing and education— in other words, the "welfare 


state" being dismantled by the Chicago Boys. "The poor won't have any 
goody-goodies to look after them anymore!" Norberto Liwsky, an Argentine 
doctor, was told as "they applied electric shocks to my gums, nipples, geni- 
tals, abdomen and ears." 51 

An Argentine priest who collaborated with the junta explained the guid- 
ing philosophy: 'The enemy was Marxism. Marxism in the church, let us 
say, and in the mother country— the danger of a new nation." 52 That "danger 
of a new nation" helps explain why so many of the juntas' victims were 
young. In Argentina, 81 percent of the thirty thousand people who were dis- 
appeared were between the ages of sixteen and thirty. 53 "We are working 
now for the next twenty years," a notorious Argentine torturer told one of his 
victims. 54 

Among the youngest were a group of high-school students who, in Sep- 
tember 1976, banded together to ask for lower bus fare. For the junta, the 
collective action showed that the teenagers had been infected with the virus 
of Marxism, and it responded with genocidal fury, torturing and killing six of 
the high-schoolers who had dared to make this subversive request." Miguel 
Osvaldo Etchecolatz, the police commissioner finally sentenced in 2006, 
was one of the key figures implicated in the attack. 

The pattern of these disappearances was clear: while the shock therapists 
were trying to remove all relics of collectivism from the economy, the shock 
troops were removing the representatives of that ethos from the streets, the 
universities and the factory floors. 

In unguarded moments, some of those on the front lines of the economic 
transformation have acknowledged that the achieving of their goals required 
mass repression. Victor Emmanuel, the Burson-Marsteller public relations 
executive who was in charge of selling the Argentine junta's new business- 
friendly regime to the outside world, told a researcher that violence was nec- 
essary to open up Argentina's "protective, statist" economy. "No one, but no 
one, invests in a country involved in a civil war," he said, but he admitted 
that it wasn't just guerrillas who died. "A lot of innocent people were proba- 
bly killed," he told the author Marguerite Feitlowitz, but, "given the situa- 
tion, immense force was required." 56 

Sergio de Castro, Pinochet's Chicago Boy economics minister who over- 
saw the implemention of shock treatment, said he could never have done it 
without Pinochet's iron fist backing him up. "Public opinion was very much 
against [us], so we needed a strong personality to maintain the policy. It 
was our luck that President Pinochet understood and had the character to 


withstand criticism." He has also observed that an "authoritarian govern- 
ment" is best suited to safeguarding economic freedom because of its "im- 
personal" use of power. 57 

As is the case with most state terror, the targeted killings served a dual pur- 
pose. First, they removed real obstacles to the project— the people most 
likely to fight back. Second, the fact that everyone witnessed the "trouble- 
makers" being disappeared sent an unmistakable warning to those who 
might be thinking of resisting, thereby eliminating future obstacles. 

And it worked. "We were confused and anguished, docile and waiting to 
take orders . . . people regressed; they became more dependent and fearful," 
recalled the Chilean psychiatrist Marco Antonio de la Parra. 58 They were, in 
other words, in shock. So when economic shocks sent prices soaring and 
wages dropping, the streets in Chile, Argentina and Uruguay remained clear 
and calm. There were no food riots, no general strikes. Families coped by 
quietly skipping meals, feeding their babies mate, a traditional tea that sup- 
presses hunger, and waking up before dawn to walk for hours to work, saving 
on bus fare. Those who died from malnutrition or typhoid were quietly 

Just a decade earlier, the countries of the Southern Cone— with their ex- 
ploding industrial sectors, rapidly rising middle classes and strong health and 
education systems — had been the hope of the developing world. Now rich 
and poor were hurtling into different economic worlds, with the wealthy 
gaining honorary citizenship in the State of Florida and the rest being 
pushed back into underdevelopment, a process that would deepen through- 
out the neoliberal "restructurings" of the postdictatorship era. No longer in- 
spirational examples, these countries were now terrifying warnings about 
what happens to poor nations that think they can pull themselves out of the 
Third World. It was a conversion that paralleled what prisoners were going 
through inside the juntas torture centers: it wasn't enough to talk— they 
were forced to renounce their most cherished beliefs, betray their lovers and 
children. The ones who gave in were called quebrados, the broken ones. So 
it was in the Southern Cone: the region wasn't just beaten, it was broken, 

Torture as "Curing" 

While the policies attempted to excise collectivism from the culture, inside 
the prisons torture tried to excise it from the mind and spirit. As an Argentine 


junta editorial rioted in 1976, "minds too must be cleansed, for that is where 
the error was born." 59 

Many torturers adopted the posture of a doctor or surgeon. Like the 
Chicago economists with their painful but necessary shock treatments, these 
interrogators imagined that their electroshocks and other torments were 
therapeutic — that they were administering a kind of medicine to their pris- 
oners, who were often referred to inside the camps as apestosos, the dirty or 
diseased ones. They would heal them of the sickness that was socialism, of 
the impulse toward collective action.* Their "treatments" were agonizing, 
certainly; they might even be lethal — but it was for the patient's own good. 
"If you have gangrene in an arm, you have to cut it off, right?" Pinochet de- 
manded, in impatient response to criticisms of his human rights record. 60 

In testimony from truth commission reports across the region, prisoners tell 
of a system designed to force them to betray the principle most integral to their 
sense of self. For most Latin American leftists, that most cherished principle 
was what Argentina's radical historian Osvaldo Bayer called "the only tran- 
scendental theology: solidarity." 61 The torturers understood the importance of 
solidarity well, and they set out to shock that impulse of social interconnected- 
ness out of their prisoners. Of course all interrogation is purportedly about 
gaining valuable information and therefore forcing betrayal, but many prison- 
ers report that their torturers were far less interested in the information, which 
they usually already possessed, than in achieving the act of betrayal itself. The 
point of the exercise was getting prisoners to do irreparable damage to that part 
of themselves that believed in helping others above all else, that part of them- 
selves that made them activists, replacing it with shame and humiliation. 

Sometimes the betrayals were completely beyond a prisoner's control. For 
instance, the Argentine prisoner Mario Villani had his agenda book with him 
when he was kidnapped. It contained the coordinates for a meeting he had 
scheduled with a friend; the soldiers showed up in his place, and another ac- 
tivist was disappeared into the terror machinery. On the table, Villanfs inter- 
rogators tortured him with the knowledge that "they got Jorge because he'd 
kept his date with me. They knew that my knowing this would be a far worse 
torment than 220 volts. The remorse is almost more than you can take." 62 

* This brought elect roshock therapy full circle to its earliest incarnation as an exorcism tech- 
nique. The first recorded use of medical electrocution was by a Swiss doctor practicing in the 
1700s. Believing that mental illness was caused by the devil, he had a patient hold on to 
a wire that he powered with a static electricity machine; one jolt of electricity was given for 
each demon. The patient was then pronounced cured. 


The ultimate acts of rebellion in this context were small gestures of kind- 
ness between prisoners, such as tending to each other's wounds or sharing 
scarce food. When such loving acts were discovered, they were met with 
harsh punishment. Prisoners were goaded into being as individualistic as 
possible, constantly offered Faustian bargains, like choosing between more 
unbearable torture for themselves or more torture for a fellow prisoner. In 
some cases, prisoners were so successfully broken that they agreed to hold 
the picana on their fellow inmates or go on television and renounce their for- 
mer beliefs. These prisoners represented the ultimate triumph for their tor- 
turers: not only had the prisoners abandoned solidarity but in order to 
survive they had succumbed to the cutthroat ethos at the heart of laissez-faire 
capitalism — "looking out for No. 1," in the words of the ITT executive.* 63 

Both groups of shock "doctors" working in the Southern Cone— the gen- 
erals and the economists — resorted to nearly identical metaphors for their 
work. Friedman likened his role in Chile to that of a physician who offered 
"technical medical advice to the Chilean Government to help end a medical 
plague"— the "plague of inflation." 64 Arnold Harberger, head of the Latin 
American program at the University of Chicago, went even further. In a lec- 
ture delivered to young economists in Argentina, long after the dictatorship 
had ended, he said that good economists are themselves the treatment— they 
serve "as antibodies to combat anti-economic ideas and policies." 65 The Ar- 
gentine junta's foreign minister, Cesar Augusto Guzzetti, said that "when 
the social body of the country has been contaminated by a disease that cor- 
rodes its entrails, it forms antibodies. These antibodies cannot be considered 
in the same way as the microbes. As the government controls and destroys 
the guerrilla, the action of the antibody will disappear, as is already happen- 
ing. It is only a natural reaction to a sick body." 66 

* The contemporary expression of this personality-breaking process is found in the way Is- 
lam is used as a weapon against Muslim prisoners in U.S. -run jails. In the mountain of evi- 
dence that has cascaded out of Abu Ghraib and Guantanamo Bay, two forms of prisoner 
abuse come up again and again: nudity and the deliberate interference with Islamic practice, 
whether by forcing prisoners to shave their beards, kicking the Koran, wrapping prisoners in 
Israeli flags, forcing men into homosexual poses, even touching men with simulated men- 
strual blood. Moazzam Begg, a former prisoner at Guantanamo, says he was frequently 
forcibly shaved and a guard would say, "This is the part that really gets to you Muslims, isn't 
it?" Islam is desecrated not because it is hated by the guards (though it may well be) but be- 
cause it is loved by the prisoners. Since the goal of torture is to unmake personalities, 
everything that comprises a prisoner's personality must be systematically stolen — from his 
clothes to his cherished beliefs. In the seventies that meant attacking social solidarity; today 
it means assaulting Islam. 


This language is, of course, the same intellectual construct that allowed 
the Nazis to argue that by killing "diseased" members of society they were 
healing the "national body." As the Nazi doctor Fritz Klein claimed, "I want 
to preserve life. And out of respect for human life, I would remove a gan- 
grenous appendix from a diseased body. The Jew is the gangrenous appendix 
in the body of mankind." The Khmer Rouge used the same language to jus- 
tify their slaughter in Cambodia: "What is infected must be cut out." 67 

"Normal" Children 

Nowhere were the parallels more chilling than in the Argentine junta's treat- 
ment of children inside its network of torture centers. The UN Convention 
on Genocide states that among the signature genocidal practices is "impos- 
ing measures intended to prevent births within the group" and "forcibly 
transferring children of the group to another group." 68 

An estimated five hundred babies were born inside Argentina's torture 
centers, and these infants were immediately enlisted in the plan to reengineer 
society and create a new breed of model citizens. After a brief nursing period, 
hundreds of babies were sold or given to couples, most of them directly linked 
to the dictatorship. The children were raised according to the values of capi- 
talism and Christianity deemed "normal" and healthy by the junta and never 
told of their heritage, according to the human rights group the Grandmothers 
of the Plaza de Mayo that has painstakingly tracked down dozens of these 
children. 69 The babies' parents, considered too diseased to be salvageable, 
were almost always killed in the camps. The baby thefts were not individual 
excesses but part of an organized state operation. In one court case, an official 
1977 Department of the Interior document was submitted as evidence; it was 
titled "Instructions on procedures to follow with underage children of politi- 
cal or union leaders when their parents are detained or disappeared." 70 

This chapter in Argentina's history has some striking parallels with the 
mass theft of indigenous children from their families in the U.S., Canada 
and Australia, where they were sent to residential schools, forbidden to speak 
their native languages, and beaten into "whiteness." In Argentina in the sev- 
enties, a similar supremacist logic was clearly at work, based not on race but 
on political belief, culture and class. 

One of the most graphic connections between the political killings and the 
free-market revolution was not discovered until four years after the Argentine 


dictatorship had ended. In 1987, a film crew was shooting in the basement 
of the Galenas Pacffico, one of Buenos Aires' plushest downtown malls, and 
to their horror they stumbled on an abandoned torture center. It turned out 
that during the dictatorship, the First Army Corps hid some of its disap- 
peared in the bowels of the mall; the dungeon walls still bore the desperate 
markings made by its long-dead prisoners: names, dates, pleas for help. 71 

Today, Galenas Pacffico is the crown jewel of Buenos Aires' shopping dis- 
trict, evidence of its arrival as a globalized consumer capital. Vaulted ceilings 
and lushly painted frescoes frame the vast array of brand-name stores, from 
Christian Dior to Ralph Lauren to Nike, unaffordable to the vast majority of 
the country's inhabitants but a bargain for the foreigners who flock to the city 
to take advantage of its depressed currency. 

For Argentines who know their history, the mall stands as a chilling re- 
minder that just as an older form of capitalist conquest was built on the mass 
graves of the country's indigenous peoples, the Chicago School Project in 
Latin America was quite literally built on the secret torture camps where 
thousands of people who believed in a different country disappeared. 




Milton [Friedman] is the embodiment of the truth that "ideas have 

—Donald Rumsfeld, U.S. defense secretary, May 2002 1 

People were in prison so that prices could be free. 

-Eduardo Galeano, 1990 2 

For a brief period, it did seem that the crimes of the Southern Cone might 
actually stick to the neoliberal movement, discrediting it before it expanded 
beyond its first laboratory. After Milton Friedman's fateful trip to Chile in 
1975, the New York Times columnist Anthony Lewis asked a simple but in- 
flammatory question: "If the pure Chicago economic theory can be carried 
out in Chile only at the price of repression, should its authors feel some re- 
sponsibility?" 3 

After the murder of Orlando Letelier, grassroots activists picked up on his 
call for "the intellectual architect" of Chile's economic revolution to be held 
responsible for the human costs of his policies. In those years, Milton Fried- 
man couldn't give a lecture without being interrupted by someone quoting 
Letelier, and he was forced to enter through the kitchen at several events 
where he was being honored. 

Students at the University of Chicago were so disturbed to learn of their 
professors' collaboration with the junta that they called for an academic in- 
vestigation. Some academics backed them up, including the Austrian econ- 
omist Gerhard Tintner, who fled European fascism and came to the U.S. in 


the 1930s. Tintner compared Chile under Pinochet to Germany under the 
Nazis and drew parallels between Friedman's support for Pinochet and the 
technocrats who collaborated with the Third Reich. (Friedman, in turn, ac- 
cused his critics of "Nazism.") 4 

Both Friedman and Arnold Harberger gladly took credit for the economic 
miracles performed by their Latin American Chicago Boys. Sounding like a 
proud father, Friedman crowed in Newsweek in 1982 that the "Chicago 
Boys . . . combined outstanding intellectual and executive ability with the 
courage of their convictions and a sense of dedication to implementing 
them." Harberger has said, "I feel prouder about my students than of any- 
thing I have written, in fact, the latino group is much more mine than the 
contribution to the literature." 5 When it came to considering the human 
costs of the "miracles" their students performed, however, both men sud- 
denly saw no relationship. 

"Despite my sharp disagreement with the authoritarian political system of 
Chile," Friedman wrote in his Newsweek column, "I do not regard it as evil 
for an economist to render technical economic advice to the Chilean Gov- 
ernment." 6 

In his memoir, Friedman claimed that Pinochet spent the first two years 
trying to run the economy on his own, and that it wasn't until "1975, when 
inflation still raged and a world recession triggered a depression in Chile, 
[that] General Pinochet turned to the 'Chicago Boys.'" 7 This was blatant 
revisionism— the Chicago Boys had been working with the military before 
the coup even took place, and the economic transformation began on the 
day the junta took power. At other points, Friedman even claimed that 
Pinochet's entire reign —seventeen years of dictatorship and tens of thou- 
sands tortured — was not a violent unmaking of democracy but its opposite. 
"The really important thing about the Chilean business is that free markets 
did work their way in bringing about a free society," Friedman said. 8 

Three weeks after Letelier was assassinated, news came that cut short the 
debates over how Pinochet's crimes reflected on the Chicago School move- 
ment. Milton Friedman had been awarded the 1976 Nobel Prize for Eco- 
nomics for his "original and weighty" work on the relationship between 
inflation and unemployment. 9 Friedman used his Nobel address to argue 
that economics was as rigorous and objective a scientific discipline as 
physics, chemistry and medicine, reliant on an impartial examination of the 
facts available. He conveniently ignored the fact that the central hypothesis 
for which he was receiving the prize was being graphically proven false by 


the breadlines, typhoid outbreaks and shuttered factories in Chile, the one 
regime ruthless enough to put his ideas into practice. 10 

One year later, something else happened to define the parameters of the 
debate about the Southern Cone: Amnesty International won the Nobel 
Peace Prize, largely for its courageous and crusading work exposing the hu- 
man rights abuses in Chile and Argentina. The economics prize is actually 
independent from the peace prize, awarded by a different committee and 
handed out in a different city. From afar, however, it seemed as if, with the 
two Nobel prizes, the most prestigious jury in the world had issued its ver- 
dict: the shock of the torture chamber was to be forcefully condemned, but 
economic shock treatments were to be applauded — and the two forms of 
shock were, as Letelier had written with dripping irony, "entirely unre- 
lated." 11 

The Blinders of "Human Rights" 

This intellectual firewall went up not only because Chicago School econo- 
mists refused to acknowledge any connection between their policies and the 
use of terror. Contributing to the problem was the particular way that these 
acts of terror were framed as narrow "human rights abuses" rather than as 
tools that served clear political and economic ends. That is partly because 
the Southern Cone in the seventies was not just a laboratory for a new eco- 
nomic model. It was also a laboratory for a relatively new activist model: the 
grassroots international human rights movement. That movement unques- 
tionably played a decisive role in forcing an end to the junta's worst abuses. 
But by focusing purely on the crimes and not on the reasons behind them, 
the human rights movement also helped the Chicago School ideology to es- 
cape from its first bloody laboratory virtually unscathed. 

The dilemma back to the inception of the modern-day human rights 
movement, with the 1948 adoption of the United Nations Universal Decla- 
ration of Human Rights. No sooner had the document been written than it 
became a partisan battering ram, used by both sides in the Cold War to ac- 
cuse the other of being the next Hitler. In 1967, press reports revealed that 
the International Commission of Jurists, the preeminent human rights group 
focused on Soviet abuses, was not the impartial arbiter it claimed to be but 
was receiving secret funding from the CIA. 12 

It was in this loaded context that Amnesty International developed its 
doctrine of strict impartiality: its financing would come exclusively from 



members, and it would remain rigorously "independent of any government, 
political faction, ideology, economic interest or religious creed." To prove 
that it was not using human rights to advance a particular political agenda, 
each Amnesty chapter was instructed to simultaneously "adopt" three pris- 
oners of conscience, one each "from communist, Western, and Third World 
countries." n Amnesty's position, emblematic of the human rights movement 
as a whole at that time, was that since human rights violations were a univer- 
sal evil, wrong in and of themselves, it was not necessary to determine why 
abuses were taking place but to document them as meticulously and credi- 
bly as possible. 

This principle is reflected in the way the terror campaign was recorded in 
the Southern Cone. Under constant surveillance and harassment from se- 
cret police, human rights groups sent delegations to Argentina, Uruguay and 
Chile to interview hundreds of victims of torture and their families; they also 
gained what access they could to prisons. Since independent media were 
banned and the juntas denied their crimes, these testimonies form the pri- 
mary documentation of a history that was never supposed to be written. Im- 
portant as this work was, it was also limited: the reports are legalistic lists of 
the most stomach-turning methods of repression, cross-referenced with the 
UN charters they violated. 

The narrow scope is most problematic in Amnesty International's 1976 
report on Argentina, a breakthrough account of the junta's atrocities and 
worthy of its Nobel Prize. Yet for all its thoroughness, the report sheds no 
light on why the abuses were occurring. It asks the question "to what extent 
are the violations explicable or necessary" to establish "security"— which 
was the junta's official rationale for the "dirty war." 14 After the evidence was 
examined, the report concludes that the threat posed by left-wing guerrillas 
was in no way commensurate with the level of repression used by the state. 

But was there some other goal that made the violence "explicable or nec- 
essary"? Amnesty made no mention of it. In fact, in its ninety-two-page re- 
port, it made no mention that the junta was in the process of remaking the 
country along radically capitalist lines. It offered no comment on the deep- 
ening poverty or the dramatic reversal of programs to redistribute wealth, 
though these were the policy centerpieces of junta rule. It carefully lists all 
the junta laws and decrees that violated civil liberties but named none of the 
economic decrees that lowered wages and increased prices, thereby violating 
the right to food and shelter— also enshrined in the UN charter. If the junta s 
revolutionary economic project had been even superficially examined, it 


would have been clear why such extraordinary repression was necessary, just 
as it would have explained why so many of Amnesty's prisoners of con- 
science were peaceful trade unionists and social workers. 

In another major omission, Amnesty presented the conflict as one re- 
stricted to the local military and the left-wing extremists. No other players are 
mentioned — not the U.S. government or the CIA; not local landowners; not 
multinational corporations. Without an examination of the larger plan to 
impose "pure" capitalism on Latin America, and the powerful interests be- 
hind that project, the acts of sadism documented in the report made no 
sense at all — they were just random, free-floating bad events, drifting in the 
political ether, to be condemned by all people of conscience but impossible 
to understand. 

Every facet of the human rights movement was functioning under highly 
restricted circumstances, though for different reasons. Inside the affected 
countries, the first people to call attention to the terror were friends and rel- 
atives of the victims, but there were severe limits on what they could say. 
They didn't talk about the political or economic agendas behind the disap- 
pearances because to do so was to risk being disappeared themselves. The 
most famous human rights activists to emerge under these dangerous cir- 
cumstances were the Mothers of the Plaza de Mayo, known in Argentina as 
the Madres. At their weekly demonstrations outside the house of government 
in Buenos Aires, the Madres did not dare hold up protest signs — instead they 
clasped photographs of their missing children with the caption ^Donde es- 
tdn? Where are they? In the place of chants, they circled silently, wearing 
white headscarves embroidered with their children's names. Many of the 
Madres had strong political beliefs, but they were careful to present them- 
selves as nothing more threatening to the regime than grieving mothers, des- 
perate to know where their innocent children had been taken.* 

In Chile, the largest of the human rights groups was the Peace Commit- 
tee, formed by opposition politicians, lawyers and Church leaders. These 
were lifelong political activists who knew that the attempt to stop torture and 
to free political prisoners was only one front in a much broader battle over 
who would have control of Chile's wealth. But in order to avoid becoming 
the regime's next victims, they dropped their usual old-left denunciations of 
the bourgeoisie and learned the new language of "universal human rights." 

* After the end of dictatorship, the Madres became some of the fiercest critics of the new 
economic order in Argentina, as they still are today. 


Scrubbed clean of references to the rich and the poor, the weak and strong, 
the North and the South, this way of explaining the world, so popular in 
North America and Europe, simply asserted that everyone has the right to a 
fair trial and to be free from cruel, inhuman and degrading treatment. It 
didn't ask why, it just asserted that. In the mixture of legalese and human in- 
terest that characterizes the human rights lexicon, they learned that their im- 
prisoned companeros were actually prisoners of conscience whose right to 
freedom of thought and speech, protected under articles 18 and 19 of the 
Universal Declaration of Human Rights, had been violated. 

For those living under dictatorship, the new language was essentially a 
code; just as musicians hid the political messages in their lyrics in sly meta- 
phors, they were disguising their leftism in legalese— a way of engaging in 
politics without mentioning politics.* 

When Latin America's terror campaign was picked up by the fast- 
expanding international human rights movement, those activists had their 
own, very different, reasons for avoiding talk of politics. 

Ford on Ford 

The refusal to connect the apparatus of state terror to the ideological project 
it served is characteristic of almost all the human rights literature from this 
period. Although Amnesty's reticence can be understood as an attempt to re- 
main impartial amid Cold War tensions, there was, for many other groups, 
another factor at play: money. By far the most significant source of funding 
for this work was the Ford Foundation, then the largest philanthropic organi- 
zation in the world. In the sixties, the organization spent only a small portion 
of its budget on human rights, but in the seventies and eighties, the founda- 
tion spent a staggering $30 million on work devoted to human rights in Latin 
America. With these funds, the foundation backed Latin American groups 
like Chile's Peace Committee as well as new U.S.-based groups, including 
Americas Watch. 15 

Prior to the military coups, the Ford Foundation's primary role in the South- 
ern Cone had been to fund the training of academics, mostly in economics 

* Even with these precautions, human rights activists were not safe from the terror. Chile's 
jails were filled with human rights lawyers, and in Argentina the junta sent one of its top tor- 
turers to infiltrate the Madres, posing as a grieving relative. In December 1977, the group 
was raided; twelve mothers were permanently disappeared, including the leader of the 
Madres, Azucena de Vicenti, along with two French nuns. 


and agricultural science, working closely with the U.S. State Department. 16 
Frank Sutton, the deputy vice president of Ford's international division, ex- 
plained the organization's philosophy: "You can't have a modernizing coun- 
try without a modernizing elite." 17 Although squarely within the Cold War 
logic of attempting to foster an alternative to revolutionary Marxism, most of 
Ford's academic grants did not betray a strong right-wing bias— Latin Ameri- 
can students were sent to a wide range of U.S. universities, and funding for 
graduate departments was provided to diverse Latin American universities, 
including large public ones with left-leaning reputations. 

But there were several significant exceptions. As discussed earlier, the Ford 
Foundation was the primary funder of the University of Chicago's Program of 
Latin American Economic Research and Training, which churned out hun- 
dreds of Latino Chicago Boys. Ford also financed a parallel program at the 
Catholic University in Santiago, designed to attract undergraduate econom- 
ics students from neighboring countries to study under Chile's Chicago Boys. 
That made the Ford Foundation, intentionally or not, the leading source of 
funding for the dissemination of the Chicago School ideology throughout 
Latin America, more significant even than the U.S. government. 18 

When the Chicago Boys came to power in a hail of gunfire alongside 
Pinochet, it did not reflect particularly well on the Ford Foundation. The 
Chicago Boys had been funded as part of the foundation's mission to "im- 
prove economic institutions for the better realization of democratic goals." 19 
Now the economic institutions that Ford had helped build in both Chicago 
and Santiago were playing a central role in the overthrow of Chile's democ- 
racy, and its former students were in the process of applying their U.S. edu- 
cation in a context of shocking brutality. Making matters more complicated 
for the foundation, this was the second time in just a few years that its pro- 
teges had chosen a violent route to power, the first case being the Berkeley 
Mafia's meteoric rise to power in Indonesia after Suharto's bloody coup. 

Ford had built the economics department at the University of Indonesia 
from the ground up, but when Suharto came to power, "nearly all the econ- 
omists that the program produced were recruited into the government," a 
Ford document notes. There was practically no one left to teach the stu- 
dents. 20 In 1974, nationalist riots broke out in Indonesia against "foreign 
subversion" of the economy; the Ford Foundation became a target of popu- 
lar rage — it was the foundation, many pointed out, that had trained Suharto's 
economists to sell Indonesia's oil and mineral wealth to Western multina- 



Between the Chicago Boys in Chile and the Berkeley Mafia in Indonesia, 
Ford was gaining an unfortunate reputation: graduates from two of its flag- 
ship programs were now dominating the most notoriously brutal right-wing 
dictatorships in the world. Although Ford could not have known that the 
ideas in which its grads were trained would be enforced with such bar- 
barism, uncomfortable questions were nonetheless raised about why a 
foundation dedicated to peace and democracy was neck-deep in authoritari- 
anism and violence. 

Whether as a result of panic, social conscience or some combination of 
both, the Ford Foundation dealt with its dictatorship problem the way any 
good business would: proactively. In the mid-seventies, Ford transformed it- 
self from a producer of "technical expertise" for the so-called Third World to 
its leading funder of human rights activism. That about-face was particularly 
jarring in both Chile and Indonesia. After the left in those countries had 
been obliterated by regimes that Ford had helped shape, it was none other 
than Ford that funded a new generation of crusading lawyers dedicated to 
freeing the hundreds of thousands of political prisoners being held by those 
same regimes. 

Given its own highly compromised history, it is hardly surprising that 
when Ford dived into human rights, it defined the field as narrowly as possi- 
ble. The foundation strongly favored groups that framed their work as legal- 
istic struggles for the "rule of law " "transparency" and "good governance." 
As one Ford Foundation officer put it, the organization's attitude in Chile 
was, "How can we do this and not get involved in politics?" 21 It wasn't just 
that Ford was an inherently conservative institution, accustomed to working 
hand in hand, and not at cross purposes, with official U.S. foreign policy.* It 
was also that any serious investigation of the goals served by the repression in 
Chile would inevitably have led directly back to the Ford Foundation and 
the central role it played in indoctrinating the country's current rulers in a 
fundamentalist sect of economics. 

There was also the question of the foundations inescapable association 
with the Ford Motor Company, a complicated relationship, especially for 
activists on the ground. Today, the Ford Foundation is wholly independent 

* In the 1950s, the Ford Foundation often served as a front organization for the CIA, allowing 
the agency to channel funds to anti-Marxist academics and artists who did not know where 
the money was coming from, a process extensively documented in The Cultural Cold War by 
Frances Stonor Saunders. Amnesty was not funded by the Ford Foundation; nor were the 
most radical of Latin America's human rights defenders, the Mothers of the Plaza de Mayo. 


of the car company and its heirs, but that was not the case in the fifties and 
sixties when it was funding education projects in Asia and Latin America. 
The foundation was started in 1936 with donations of stock from three Ford 
Motor executives, including Henry and Edsel Ford. As the foundation's 
wealth expanded, it began to operate independently, but its divestment of 
Ford Motor stock was not completed until 1974, the year after the coup in 
Chile and several years after the coup in Indonesia, and it had Ford family 
members on its board until 1976. 22 

In the Southern Cone, the contradictions were surreal: the philanthropic 
legacy of the very company most intimately associated with the terror 
apparatus— accused of having a secret torture facility on its property and of 
helping to disappear its own workers— was the best, and often the only, 
chance of putting an end to the worst of the abuses. Through its funding of 
human rights campaigners, the Ford Foundation saved many lives in those 
years. And it deserves at least part of the credit for persuading the U.S. Con- 
gress to cut military support to Argentina and Chile, gradually forcing the 
juntas of the Southern Cone to scale back the most brutal of their repressive 
tactics. But when Ford rode to the rescue, its assistance came at a price, and 
that price was— consciously or not— the intellectual honesty of the human 
rights movement. The foundation's decision to get involved in human rights 
but "not get involved in politics" created a context in which it was all but im- 
possible to ask the question underlying the violence it was documenting: 
Why was it happening, in whose interests? 

That omission has played a disfiguring role in the way the history of the 
free-market revolution has been told, largely absent any taint of the extraor- 
dinarily violent circumstances of its birth. Just as the Chicago economists 
had nothing to say about the torture (it had nothing to do with their areas of 
expertise), the human rights groups had little to say about the radical trans- 
formations taking place in the economic sphere (it was beyond their narrow 
legal purview). 

The idea that the repression and the economics were in fact a single uni- 
fied project is reflected in only one major human rights report from this pe- 
riod: Brasil: Nunca Mais. Significantly, it is the only truth commission report 
published independently of both the state and foreign foundations. It is 
based on the military's court records, secretly photocopied over years by 
tremendously brave lawyers and Church activists while the country was still 
under dictatorship. After detailing some of the most horrific crimes, the au- 
thors pose that central question so studiously avoided by others: Why? They 


answer matter-of-factly: "Since the economic policy was extremely unpopu- 
lar among the most numerous sectors of the population, it had to be imple- 
mented by force." 23 

The radical economic model that took such deep root during dictatorship 
would prove hardier than the generals who implemented it. Long after the 
soldiers returned to their barracks, and Latin Americans were permitted to 
elect their governments once again, the Chicago School logic remained 
firmly entrenched. 

Claudia Acuna, an Argentine journalist and educator, told me how diffi- 
cult it had been in the seventies and eighties to fully grasp that violence was 
not the goal of the junta but only the means. "Their human rights violations 
were so outrageous, so incredible, that stopping them of course became the 
priority. But while we were able to destroy the secret torture centers, what we 
couldn't destroy was the economic program that the military started and 
continues to this day." 

In the end, as Rodolfo Walsh predicted, many more lives would be stolen 
by "planned misery" than by bullets. In a way, what happened in the South- 
ern Cone of Latin America in the seventies is that it was treated as a murder 
scene when it was, in fact, the site of an extraordinarily violent armed rob- 
bery. "It was as if that blood, the blood of the disappeared, covered up the 
cost of the economic program," Acuna told me. 

The debate about whether "human rights" can ever truly be separated from 
politics and economics is not unique to Latin America; these are questions that 
surface whenever states use torture as a weapon of policy. Despite the mystique 
that surrounds it, and the understandable impulse to treat it as aberrant behav- 
ior beyond politics, torture is not particularly complicated or mysterious. A 
tool of the crudest kind of coercion, it crops up with great predictability when- 
ever a local despot or a foreign occupier lacks the consent needed to rule: 
Marcos in the Philippines, the shah in Iran, Saddam in Iraq, the French in Al- 
geria, the Israelis in the occupied territories, the U.S. in Iraq and Afghanistan. 
The list could stretch on and on. The widespread abuse of prisoners is a virtu- 
ally foolproof indication that politicians are trying to impose a system— 
whether political, religious or economic — that is rejected by large numbers of 
the people they are ruling. Just as ecologists define ecosystems by the presence 
of certain "indicator species" of plants and birds, torture is an indicator species 
of a regime that is engaged in a deeply anti-democratic project, even if that 
regime happens to have come to power through elections. 


As a means of extracting information during interrogations, torture is no- 
toriously unreliable, but as a means of terrorizing and controlling popula- 
tions, nothing is quite as effective. It was for this reason that, in the fifties and 
sixties, many Algerians grew impatient with French liberals who expressed 
their moral outrage over news that their soldiers were electrocuting and 
water-boarding liberation fighters— and yet did nothing to end the occupa- 
tion that was the reason for these abuses. 

In 1962, Gisele Halimi, a French lawyer for several Algerians who had 
been brutally raped and tortured in prison, wrote in exasperation, "The 
words were the same stale cliches: ever since torture had been used in Alge- 
ria there had always been the same words, the same expression of indigna- 
tion, the same signatures to public protests, the same promises. This 
automatic routine had not abolished one set of electrodes or water-hoses; 
nor had it in any remotely effective way curbed the power of those who used 
them." Simone de Beauvoir, writing on the same subject, concurred: "To 
protest in the name of morality against 'excesses' or 'abuses' is an error which 
hints at active complicity. There are no 'abuses' or 'excesses' here, simply an 
all-pervasive system." 24 

Her point was that the occupation could not be done humanely; there is 
no humane way to rule people against their will. There are two choices, 
Beauvoir wrote: accept occupation and all the methods required for its en- 
forcement, "or else you reject, not merely certain specific practices, but the 
greater aim which sanctions them, and for which they are essential." The 
same stark choice is available in Iraq and Israel/Palestine today, and it was 
the only option in the Southern Cone in the seventies. Just as there is no kind, 
gentle way to occupy people against their determined will, there is no peace- 
ful way to take away from millions of citizens what they need to live with 
dignity— which is what the Chicago Boys were determined to do. Robbery, 
whether of land or a way of life, requires force or at least its credible threat; 
it's why thieves carry guns, and often use them. Torture is sickening, but it is 
often a highly rational way to achieve a specific goal; indeed, it may be the 
only way to achieve those goals. Which raises the deeper question, one that 
so many were incapable of asking at the time in Latin America. Is neo- 
liberalism an inherently violent ideology, and is there something about its 
goals that demands this cycle of brutal political cleansing, followed by hu- 
man rights cleanup operations? 

One of the most moving testimonies on this question comes from Sergio 



Tomasella, a tobacco farmer and secretary-general of Argentina's Agrarian 
Leagues, who was tortured and imprisoned for five years, as were his wife 
and many friends and family members.* In May 1990, Tomasella took the 
overnight bus to Buenos Aires from the rural province of Corrientes in order 
to add his voice to the Argentine Tribunal against Impunity, which was 
hearing testimony on human rights abuses during the dictatorship. 
Tomasella's testimony was different from the others. He stood before the ur- 
ban audience in his farming clothes and work boots and explained that he 
was the casualty of a long war, one between poor peasants who wanted 
pieces of land to form cooperatives and the all-powerful ranchers who 
owned half the land in his province. "The line is continuous— those who 
took the land from the Indians continue to oppress us with their feudal 
structures." 25 

He insisted that the abuse he and his fellow members of the Agrarian 
Leagues suffered could not be isolated from the huge economic interests 
served by the breaking of their bodies and destruction of their activist net- 
works. So instead of naming the soldiers who abused him, he chose to name 
the corporations, both foreign and national, that profit from Argentina's con- 
tinued economic dependence. "Foreign monopolies impose crops on us, 
they impose chemicals that pollute our earth, impose technology and ideol- 
ogy. All this through the oligarchy which owns the land and controls the pol- 
itics. But we must remember— the oligarchy is also controlled, by the very 
same monopolies, the very same Ford Motors, Monsanto, Philip Morris. It's 
the structure we have to change. This is what I have come to denounce. 
That's all." 

The auditorium erupted in applause. Tomasella concluded his testimony 
with these words: "I believe that truth and justice will eventually triumph. It 
will take generations. If I am to die in this fight, then so be it. But one day we 
will triumph. In the meantime, I know who the enemy is, and the enemy 
knows who I am, too." 26 

The Chicago Boys' first adventure in the seventies should have served as a 
warning to humanity: theirs are dangerous ideas. By failing to hold the ideology 
accountable for the crimes committed in its first laboratory, this subculture of 
unrepentant ideologues was given immunity, freed to scour the world for its 

* For this account I am indebted to Marguerite Feitlowitz's inspiring book, A Lexicon of Terror. 


next conquest. These days, we are once again living in an era of corporatist 
massacres, with countries suffering tremendous military violence alongside 
organized attempts to remake them into model "free market" economies; 
disappearances and torture are back with a vengeance. And once again the 
goals of building free markets, and the need for such brutality, are treated as 
entirely unrelated. 




An armed conflict between nations horrifies us. But the 
economic war is no better than an armed conflict. This 
is like a surgical operation. An economic war is pro- 
longed torture. And its ravages are no less terrible than 
those depicted in the literature on war properly so 
called. We think nothing of the other because we are 
used to its deadly effects. . . . The movement against 
war is sound. I pray for its success. But I cannot help 
the gnawing fear that the movement will fail if it does 
not touch the root of all evil— human greed. 

— M. K. Gandhi, "Non-Violence— The Greatest Force," 




Sovereign is he who decides the state of emergency. 

— Carl Schmitt, Nazi lawyer 1 

When Friedrich Hayek, patron saint of the Chicago School, returned from a 
visit to Chile in 1981, he was so impressed by Augusto Pinochet and the 
Chicago Boys that he sat down and wrote a letter to his friend Margaret 
Thatcher, prime minister of Britain. He urged her to use the South Ameri- 
can country as a model for transforming Britain's Keynesian economy. 
Thatcher and Pinochet would later become firm friends, with Thatcher fa- 
mously visiting the aging general under house arrest in England as he faced 
charges of genocide, torture and terrorism. 

The British prime minister was well acquainted with what she called "the 
remarkable success of the Chilean economy," describing it as "a striking ex- 
ample of economic reform from which we can learn many lessons." Yet 
despite her admiration for Pinochet, when Hayek first suggested that she em- 
ulate his shock therapy policies, Thatcher was far from convinced. In Febru- 
ary 1982, the prime minister bluntly explained the problem in a private letter 
to her intellectual guru: "I am sure you will agree that, in Britain with our 
democratic institutions and the need for a high degree of consent, some of 
the measures adopted in Chile are quite unacceptable. Our reform must be 
in line with our traditions and our Constitution. At times the process may 
seem painfully slow." 2 

The bottom line was that Chicago-style shock therapy just wasn't possible 
in a democracy like the U.K. Thatcher was three years into her first term, 


sinking in the polls and not about to guarantee a loss in the next election by 
doing anything as radical or unpopular as Hayek was suggesting. 

For Hayek and the movement he represented, it was a disappointing as- 
sessment. The Southern Cone's experiment had generated such spectacular 
profits, albeit for a small number of players, that there was tremendous ap- 
petite from increasingly global multinationals for new frontiers— and not 
just in developing countries but in rich ones in the West too, where states 
controlled even more lucrative assets that could be run as for-profit interests: 
phones, airlines, television airwaves, power companies. If anyone could have 
championed this agenda in the wealthy world, it would surely have been ei- 
ther Thatcher in England or the American president at the time, Ronald 

In 1981, Fortune magazine ran an article extolling the virtues of "Chile's 
Brave New World of Reaganomics." Praising Santiago's "glittering, luxury 
filled shops" and "shiny new Japanese cars," the article was oblivious to the 
pervasive repression and the explosion of shantytowns. "What can we learn 
from Chile s experiment in economic orthodoxy?" it asked, and quickly pro- 
vided the correct answer: "If a small undeveloped country can live by the 
theory of competitive advantage, then surely our infinitely more resourceful 
economy can." 3 

However, as Thatcher's letter to Hayek made clear, it wasn't quite as sim- 
ple as that. Elected leaders have to worry about what voters think of their job 
performance, which comes up for regular review. And in the early eighties, 
even with Reagan and Thatcher in power and Hayek and Friedman serving 
as influential advisers, it was not at all clear that the kind of radical economic 
agenda that had been imposed with such ferocious violence in the Southern 
Cone would ever be possible in Britain and the United States. 

A decade earlier, Friedman and his movement had faced a great disap- 
pointment in the U.S. at the hands of none other than Richard Nixon, one 
that seemed to confirm this point. Even though Nixon had helped put the 
Chicago Boys in power in Chile, he had taken a very different route at 
home — an inconsistency Friedman would never forgive. When Nixon took 
office in 1969, Friedman thought his time had finally come to lead his do- 
mestic counterrevolution against the legacy of the New Deal. "Few presi- 
dents have come closer to expressing a philosophy compatible with my 
own," Friedman wrote of Nixon. 4 The two men met regularly in the Oval 
Office, and Nixon named several of Friedman's like-minded friends and col- 
leagues to key economics posts. One was the University of Chicago professor 


George Shultz, whom Friedman helped recruit to work for Nixon; another 
was Donald Rumsfeld, then thirty-seven. In the sixties, Rumsfeld used to at- 
tend seminars at the University of Chicago, gatherings he later described in 
reverential terms. Rumsfeld called Friedman and his colleagues "a cluster of 
geniuses," while he and other self-described "young pups" would "come in 
and learn at their feet. ... I was so privileged." 5 With true disciples making 
policy and a strong personal rapport with the president, Friedman had every 
reason to believe that his ideas were about to be put into practice in the most 
powerful economy in the world. 

But in 1971, the U.S. economy was in a slump; unemployment was high 
and inflation was pushing prices way up. Nixon knew that if he followed 
Friedman's laissez-faire advice, millions of angry citizens would vote him 
out of a job. He decided to put caps on the prices of necessities such as rent 
and oil. Friedman was outraged: of all possible government "distortions," 
price controls were the absolute worst. He called them "a cancer that can de- 
stroy an economic system's capacity to function." 6 

Even more disgraceful, it was his own disciples who were the Keynesian 
enforcers: Rumsfeld was in charge of the wage-and-price-control program, 
and he answered to Shultz, who at the time was director of the Office of 
Management and Budget. At one point, Friedman called Rumsfeld at the 
White House and berated his former "young pup." According to Rumsfeld, 
Friedman instructed him, "You have got to stop doing what you are doing." 
The novice bureaucrat replied that it seemed to be working— inflation was 
going down, the economy was growing. Friedman fired back that that was 
the greatest crime of all: "People are going to think that you're doing it . . . 
they're going to learn the wrong lesson." 7 They did indeed, and they re- 
elected Nixon with 60 percent of the popular vote the following year. In his 
second term, the president proceeded to shred even more of Friedman's or- 
thodoxies, passing a slew of new laws imposing higher environmental and 
safety standards on industry. "We are all Keynesians now," Nixon famously 
proclaimed— the crudest cut of all. 8 So deep was this betrayal that Fried- 
man would later describe Nixon as "the most socialist of the presidents of the 
United States in the 20th century." 9 

Nixon's tenure was a stark lesson for Friedman. The University of 
Chicago professor had built a movement on the equation of capitalism and 
freedom, yet free people just didn't seem to vote for politicians who followed 
his advice. Worse, dictatorships— where freedom was markedly absent— 
were the only governments who were ready to put pure free-market doctrine 


into practice. So while they griped about being betrayed at home, Chicago 
School luminaries junta-hopped their way through the seventies. Almost 
everywhere that right-wing military dictatorships were in power, the Univer- 
sity of Chicago's presence could be felt. Harberger worked as a consultant to 
Bolivia's military regime in 1976 and accepted an honorary degree from Ar- 
gentina's University of Tucuman in 1979, a time when universities were un- 
der the control of the junta. 10 And farther afield, he advised Suharto and the 
Berkeley Mafia in Indonesia. Friedman wrote an economic liberalization 
program for the repressive Chinese Communist Party when it decided to 
convert to a market economy. 11 

Stephen Haggard, a staunch neoliberal political scientist at the University 
of California, conceded the "sad fact" that "some of the widest-ranging reform 
efforts in the developing world were undertaken following military coups" — 
in addition to the Southern Cone and Indonesia, he listed Turkey, South Ko- 
rea and Ghana. Other success stories took place not after military coups but 
in one-party states like Mexico, Singapore, Hong Kong and Taiwan. In direct 
contradiction of Friedman's central claim, Haggard concluded that "good 
things— such as democracy and market-oriented economic policy— do not 
always go together." 12 Indeed, in the early eighties, there was not a single case 
of a multiparty democracy going full-tilt free market. 

Leftists in the developing world have long argued that genuine democ- 
racy, with fair rules preventing corporations from buying elections, would 
necessarily result in governments committed to the redistribution of wealth. 
The logic is simple enough: in these countries, there are far more poor peo- 
ple than rich ones. Policies that directly redistribute land and raise wages, 
not trickle-down economics, are in the clear self-interest of a poor majority. 
Give all citizens the vote and a reasonably fair process, and they will elect 
the politicians who appear most likely to deliver jobs and land, not more 
free-market promises. 

For all these reasons, Friedman had spent a fair bit of time staring down 
an intellectual paradox: as the heir to Adam Smith's mantle, he believed pas- 
sionately that humans are governed by self-interest and that society works 
best when self-interest is allowed to govern almost all activities— except 
when it comes to a little activity called voting. Since most people in the 
world are either poor or live below the average income in their countries (in- 
cluding in the U.S.), it is in their short-term self-interest to vote for politicians 
promising to redistribute wealth from the top of the economy down to 
them. 13 Friedman's longtime friend Allan Meltzer, a fellow monetarist 


economist, put the conundrum this way: "Votes are more equally distributed 
than income. . . . Voters with incomes at the median or below gain by trans- 
ferring income to themselves." Meltzer described this reaction as "part of the 
cost of democratic government and political freedom" but said that "the 
Friedmans [Milton and his wife, Rose] swam against this strong current. 
They could not stop or reverse it, but they influenced far more than most the 
ways in which people and politicians think and act." 14 

Across the Atlantic, Thatcher was attempting an English version of Fried- 
manism by championing what has become known as "the ownership soci- 
ety." The effort centered on Britain's public housing, or council estates, 
which Thatcher opposed on philosophical grounds, believing that the state 
had no role to play in the housing market. The council estates were filled 
with the type of people who wouldn't vote Tory because it wasn't in their 
economic self-interest; Thatcher was convinced that if they could be 
brought into the market, they would start to identify with the interests of the 
wealthier people who opposed redistribution. With that in mind, she offered 
strong incentives to the residents of public housing to buy their flats at re- 
duced rates. Those who could became homeowners, while those who 
couldn't faced rents that were almost twice as high as before. It was a divide- 
and-conquer strategy, and it worked: the renters continued to oppose 
Thatcher, the streets of Britain's large cities saw a visible increase in home- 
lessness, but polls showed that more than half of the new owners did switch 
their party affiliation to the Tories. 15 

Although the estate sales offered a glimmer of hope for the possibility of 
hard-right economics in a democracy, Thatcher still looked poised to lose 
her job after just one term. In 1979, she had run on the slogan "Labor isn't 
working," but by 1982, the number of unemployed had doubled under her 
watch, as had the inflation rate. 16 She had tried to take on one of the most 
powerful unions in the country, the coal miners, and had failed. After three 
years in office, Thatcher saw her personal approval rating drop to only 25 
percent— lower than George W. Bush at his lowest point and lower than any 
British prime minister in the history of opinion polls. Approval for her gov- 
ernment as a whole had sunk to 18 percent. 17 With a general election loom- 
ing, Thatcherism was about to come to an early and inglorious close, well 
before the Tories had achieved their most ambitious goals of mass privatiza- 
tion and breaking the blue-collar unions. It was in those trying circum- 
stances that Thatcher wrote to Hayek, politely informing him that a 
Chilean-style transformation was "quite unacceptable" in the U.K. 


Thatcher's catastrophic first term seemed to further confirm the lessons of 
the Nixon years: that the radical and highly profitable policies of the 
Chicago School couldn't survive in a democratic system. It seemed clear 
that the successful imposition of economic shock therapy required some 
other sort of shock— whether of a coup, or of the torture chamber delivered 
by a repressive regime. 

That was an especially disturbing prospect on Wall Street because, in the 
early eighties, authoritarian regimes were starting to collapse around the 
world — Iran, Nicaragua, Ecuador, Peru, Bolivia — and many more would 
follow in what the conservative political scientist Samuel Huntington would 
term the "third wave" of democracy. 18 These were worrying developments— 
what would prevent the emergence of another Allende, winning votes and 
support with populist policies? 

Washington had watched as that very scenario played out in both Iran 
and Nicaragua in 1979. In Iran, the U.S. -backed shah was overthrown by a 
coalition of leftists and Islamists. While the stories of hostages and ayatol- 
lahs made the news, the economic side of the program was also raising 
alarms in Washington. The Islamic regime, which had not yet transitioned 
to full-blown authoritarianism, nationalized the banking sector and then 
brought in a land redistribution program. It also imposed controls on im- 
ports and exports, a reversal of the shah's free-trade policies. 19 Five months 
later in Nicaragua, the U.S.-backed dictatorship of Anastasio Somoza 
Dabayle fell to a popular revolt that installed the left-wing Sandinista gov- 
ernment. It controlled imports and, like the Iranians, nationalized the bank- 
ing industry. 

It added up to a grim prognosis for the dream of a global free market. By 
the early eighties, Friedmanites were facing the prospect that their revolu- 
tion, less than a decade old, could not survive a new populist wave. 

War to the Rescue 

Six weeks after Thatcher wrote that letter to Hayek, something happened 
that changed her mind and altered the destiny of the corporatist crusade: on 
April 2, 1982, Argentina invaded the Falkland Islands, a relic of British colo- 
nial rule. The Falklands War, or the Malvinas War if you are Argentine, went 
down in history as a vicious but fairly minor battle. At the time, the Falklands 
appeared to have no strategic importance. The cluster of islands off the Ar- 
gentine coast was thousands of miles from Britain and costly to guard and 


maintain. Argentina, too, had little use for them, though having a British 
outpost in its waters was regarded as an affront to national pride. The leg- 
endary Argentine writer Jorge Luis Borges scathingly described the land dis- 
pute as "a fight between two bald men over a comb." 20 

From a military standpoint, the eleven-week battle appears to have almost 
no historic significance. Overlooked, however, was the war's impact on the 
free-market project, which was enormous: it was the Falklands War that gave 
Thatcher the political cover she needed to bring a program of radical capi- 
talist transformation to a Western liberal democracy for the first time. 

Both sides in the conflict had good reasons to want a war. In 1982, Ar- 
gentina's economy was collapsing under the weight of its debt and corrup- 
tion, and human rights campaigns were gaining momentum. A new junta 
government, led by General Leopoldo Galtieri, calculated that the only 
thing more powerful than the anger at its continued suppression of democ- 
racy was anti-imperialist sentiment, which Galtieri expertly unleashed on 
the British for their refusal to give up the islands. Soon enough, the junta 
had Argentina's blue-and-white flag planted on that rocky outpost, and the 
country cheered on cue. 

When news arrived that Argentina had laid claim to the Falklands, Thatcher 
recognized it as a last-ditch hope to turn around her political fortunes and im- 
mediately went into Churchillian battle mode. Until this point, she had shown 
only disdain for the financial burden that the Falklands placed on government 
coffers. She had cut grants to the islands and announced major cutbacks to the 
navy, including the armed ships that guarded the Falklands— moves read by 
the Argentine generals as clear indications that Britain was ready to cede the 
territory. (One of Thatcher's biographers characterized her Falklands policy as 
"practically an invitation to Argentina to invade.") 21 In the lead-up to the war, 
critics across the political spectrum accused Thatcher of using the military for 
her own political goals. The Labour MP Tony Benn said, "It looks more and 
more as if what is at stake is Mrs. Thatcher's reputation, not the Falkland 
Islands at all," while the conservative Financial Times noted, "What is de- 
plorable is that the issue is rapidly becoming mixed up with political differ- 
ences within Britain itself which have nothing to do with the matter in hand. 
Not only the pride of the Argentine Government is involved. So is the standing, 
perhaps even the survival, of the Tory Government in Britain." 22 

Yet even with all of this healthy cynicism in the run-up, as soon as troops 
were deployed, the country was swept up in what a draft Labour Party reso- 
lution described as a "jingoistic, militaristic frame of mind," embracing the 


Falkland Islands as a last blast of glory for Britain's faded empire. 23 Thatcher 
praised the "Falklands spirit" gripping the nation, which in practice meant 
that shouts of "Ditch the bitch!" subsided while "Up Your Junta!" T-shirts 
sold briskly. 24 Neither London nor Buenos Aires made any serious attempt to 
avoid a showdown. Thatcher brushed aside the United Nations much as 
Bush and Blair did in the run-up to the war in Iraq, uninterested in sanctions 
or negotiations. Glorious victory was the only outcome that either side had 
any interest in. 

Thatcher was fighting for her political future— and she succeeded spec- 
tacularly. After the Falklands victory, which took the lives of 255 British sol- 
diers and 655 Argentines, the prime minister was heralded as a war hero, her 
moniker "Iron Lady" transformed from insult to high praise. 25 Her poll num- 
bers were similarly transformed. Thatcher's personal approval rating more 
than doubled over the course of the battle, from 25 percent at the start to 59 
percent at the end, paving the way for a decisive victory in the following 
year's election. 26 

The British military's counterinvasion of the Falklands was code-named 
Operation Corporate, and though it was an odd name for a military cam- 
paign, it proved prescient. Thatcher used the enormous popularity afforded 
her by the victory to launch the very corporatist revolution she had told 
Hayek was impossible before the war. When the coal miners went on strike 
in 1984, Thatcher cast the standoff as a continuation of the war with Ar- 
gentina, calling for similarly brutal resolve. She famously declared, "We 
had to fight the enemy without in the Falklands and now we have to fight 
the enemy within, which is much more difficult but just as dangerous to 
liberty." 27 With British workers now categorized as "the enemy within," 
Thatcher unleashed the full force of the state on the strikers, including, in a 
single confrontation, eight thousand truncheon-wielding riot police, many 
on horseback, to storm a plant picket line, leading to roughly seven hun- 
dred injuries. Over the course of the long strike, the number of injuries 
reached into the thousands. As the Guardian reporter Seumas Milne docu- 
ments in his definitive account of the strike, The Enemy Within: Thatcher's 
Secret War against the Miners, the prime minister pressed the security ser- 
vices to intensify surveillance of the union and, in particular, its militant 
president, Arthur Scargill. What ensued was "the most ambitious counter- 
surveillance operation ever mounted in Britain." The union was infiltrated 
by multiple agents and informers, and all its phones were bugged, as were 
the homes and even the fish-and-chips shop frequented by its leadership. 


The chief executive of the union was alleged, on the floor of the House of 
Commons, to have been an MI5 agent sent in to "destabilize and sabotage 
the union," though he denied the charge. 28 

Nigel Lawson, U.K. chancellor of the exchequer during the strike, ex- 
plained that the Thatcher government considered the union to be its enemy. 
"It was just like arming to face the threat of Hitler in the late 1930s/' Lawson 
said a decade later. "One had to prepare." 29 As in the Falklands, there was lit- 
tle interest in bargaining, just a focused determination to break the union, 
regardless of the cost (and with three thousand extra police a day, the cost 
was enormous). Colin Naylor, an acting police sergeant who was on the 
front lines of the conflict, described it as "a civil war." 30 

By 1985, Thatcher had won this war too: workers were going hungry and 
couldn't hold out; in the end 966 people were fired. 31 It was a devastating 
setback for Britain's most powerful union, and it sent a clear message to the 
others: if Thatcher was willing to go to the wall to break the coal miners, on 
whom the country depended for its lights and warmth, it would be suicide 
for weaker unions producing less crucial products and services to take on her 
new economic order. Better just to accept whatever was on offer. It was a 
message very similar to the one Ronald Reagan had sent a few months after 
he took office with his response to a strike by the air-traffic controllers. By not 
showing up to work, they had "forfeited their jobs and will be terminated " 
Reagan said. Then he fired 1 1,400 of the country's most essential workers in 
a single blow— a shock from which the U.S. labor movement has yet to fully 
recover. 32 

In Britain, Thatcher parlayed her victory in the Falklands and over the 
miners into a major leap forward for her radical economic agenda. Between 
1984 and 1988, the government privatized, among others, British Telecom, 
British Gas, British Airways, British Airport Authority and British Steel, 
while it sold its shares in British Petroleum. 

Much as the terrorist attacks of September 11, 2001, would take an 
unpopular president and hand him an opportunity to launch a massive pri- 
vatization initiative (in Bush's case, the privatization of security, warfare 
and reconstruction), Thatcher used her war to launch the first mass privati- 
zation auction in a Western democracy. This was the real Operation Cor- 
porate, one with historic implications. Thatcher's successful harnessing of 
the Falklands War was the first definitive evidence that a Chicago School 
economic program did not need military dictatorships and torture cham- 
bers in order to advance. She had proved that with a large enough political 


crisis to rally around, a limited version of shock therapy could be imposed 
in a democracy. 

Still, Thatcher had needed an enemy to unite the country, a set of ex- 
traordinary circumstances that justified her use of emergency measures and 
repression— a crisis that made her look tough and decisive rather than cruel 
and regressive. The war had served her purpose perfectly, but the Falklands 
War was an anomaly in the early eighties, a throwback to earlier colonial 
conflicts. If the eighties were really going to be the dawn of a new age of 
peace and democracy, as many claimed, then Falklands-type clashes would 
be far too infrequent to form the basis of a global political project. 

It was in 1982 that Milton Friedman wrote the highly influential passage 
that best summarizes the shock doctrine: "Only a crisis— actual or 
perceived — produces real change. When that crisis occurs, the actions that 
are taken depend on the ideas that are lying around. That, I believe, is our 
basic function: to develop alternatives to existing policies, to keep them alive 
and available until the politically impossible becomes politically in- 
evitable." 33 It was to become a kind of mantra for his movement in the new 
democratic era. Allan Meltzer elaborated on the philosophy: "Ideas are al- 
ternatives waiting on a crisis to serve as the catalyst of change. Friedman's 
model of influence was to legitimize ideas, to make them bearable, and 
worth trying when the opportunity comes." 34 

The kind of crisis Friedman had in mind was not military but economic. 
What he understood was that in normal circumstances, economic decisions 
are made based on the push and pull of competing interests— workers want 
jobs and raises, owners want low taxes and relaxed regulation, and politicians 
have to strike a balance between these competing forces. However, if an 
economic crisis hits and is severe enough— a currency meltdown, a market 
crash, a major recession — it blows everything else out of the water, and lead- 
ers are liberated to do whatever is necessary (or said to be necessary) in the 
name of responding to a national emergency. Crises are, in a way, 
democracy-free zones— gaps in politics as usual when the need for consent 
and consensus do not seem to apply. 

The idea that market crashes can act as catalysts for revolutionary change 
has a long history on the far left, most notably in the Bolshevik theory that 
hyperinflation, by destroying the value of money, takes the masses one step 
closer to the destruction of capitalism itself. 35 This theory explains why a 
certain breed of sectarian leftist is forever calculating the exact conditions 


under which capitalism will reach "the crisis ," much as evangelical Chris- 
tians calibrate signs of the coming Rapture. In the mid-eighties, this Com- 
munist idea began to experience a powerful revival, picked up by Chicago 
School economists who argued that just as market crashes could precipitate 
left-wing revolutions, so too could they be used to spark right-wing counter- 
revolutions, a theory that became known as "the crisis hypothesis." 36 

Friedman's interest in crisis was also a clear attempt to learn from the vic- 
tories of the left after the Great Depression: when the market crashed, 
Keynes and his disciples, previously voices in the wilderness, had been ready 
and waiting with their ideas, their New Deal solutions. In the seventies and 
early eighties, Friedman and his corporate underwriters had attempted to 
mimic this process with their unique brand of intellectual disaster prepared- 
ness. They painstakingly built up a new network of right-wing think tanks, 
including Heritage and Cato, and produced the most significant vehicle to 
disseminate Friedman's views, the ten-part PBS miniseries Free to Choose — 
underwritten by some of the largest corporations in the world, including 
Getty Oil, Firestone Tire & Rubber Co., PepsiCo, General Motors, Bechtel 
and General Mills. 37 When the next crisis hit, Friedman was determined 
that it would be his Chicago Boys who would be the ones ready with their 
ideas and their solutions. 

At the time he first articulated the crisis theory in the early eighties, the 
U.S. was in a recession— a double whammy of high inflation and unem- 
ployment. And Chicago School policies, now known as Reaganomics, cer- 
tainly held sway in Washington. But even Reagan didn't dare implement the 
kind of sweeping shock therapy that Friedman dreamed of, the kind he had 
prescribed in Chile. 

Once again, it would be a Latin American country that would be the test- 
ing ground for Friedman's crisis theory— and this time, it wouldn't be a 
Chicago Boy who would lead the way, but a new breed of shock doctor, one 
more suited to the new democratic age. 




Bolivia's situation could well be compared with the case of a per- 
son who has cancer. He knows he faces that most dangerous and 
painful operation which monetary stabilization and a number of 
other measures will undoubtedly be. Yet he has no alternative. 

—Cornelius Zondag, U.S. economic adviser to Bolivia, 1956. 1 

The use of cancer in political discourse encourages fatalism and 
justifies "severe" measures— as well as strongly reinforcing the 
widespread notion that the disease is necessarily fatal. The con- 
cept of disease is never innocent. But it could be argued that the 
cancer metaphors are in themselves implicitly genocidal. 
—Susan Sontag, illness as Metaphor, 1977 2 

In 1985, Bolivia was part of the democratic wave sweeping the developing 
world. For eighteen of the previous twenty-one years, Bolivians had been liv- 
ing under some form of dictatorship. Now they were getting the chance to 
choose their president in national elections. 

Winning control over Bolivia's economy at this particular juncture 
looked less like a prize than a punishment, however: its debt was so high that 
the amount Bolivia owed in interest surpassed its entire national budget. A 
year earlier, in 1984, Ronald Reagan's administration pushed the country 
over the edge by funding an unprecedented attack on its coca farmers, who 
grow the green leaf that can be refined into cocaine. The siege, which 
turned a large section of Bolivia into a military zone, didn't just choke the 


coca trade, but cut off the source of roughly half of the country's export rev- 
enues, triggering an economic meltdown. As The New York Times reported, 
"When the army marched into the Chapare in August, closing the narcodol- 
lar pipeline part way, the shock wave immediately hit the thriving black mar- 
ket in dollars . . . less than a week after the Chapare occupation, the 
Government was forced to drop the peso's official value by more than half." 
A few months later, inflation had increased tenfold, and thousands were 
leaving the country in search of jobs in Argentina, Brazil, Spain and the 
United States. 3 

It was in those volatile circumstances, with inflation up to 14,000 percent, 
that Bolivia entered its historic 1985 national elections. The election was a 
race between two familiar figures for Bolivians— their former dictator, Hugo 
Banzer, and their former elected president, Victor Paz Estenssoro. The vote 
was very close, and the final decision would be left to Bolivia's Congress, but 
Banzer's team was sure it had won. Before the results were announced, the 
party enlisted the help of a little-known thirty-year-old economist named Jef- 
frey Sachs to help develop an anti-inflation economic plan. Sachs was the ris- 
ing star of Harvard's economics department, raking in academic awards and 
becoming one of the university's youngest tenured professors. A few months 
earlier, a delegation of Bolivian politicians had visited Harvard and seen 
Sachs in action; they had been impressed by his bravado — he had told them 
that he could turn around their inflationary crisis in a day. Sachs had no ex- 
perience in development economics, but, by his own admission, "I thought 
that I knew just about everything that needed to be known" about inflation. 4 

Sachs had been heavily influenced by Keynes's writings on the connec- 
tion between hyperinflation and the spread of fascism in Germany after the 
First World War. The peace agreement imposed on Germany had sent it 
into severe economic crisis — including a hyperinflation rate of 3.25 million 
percent in 1923— which was then compounded by the Great Depression a 
few years later. With an unemployment rate of 30 percent and generalized 
rage at what seemed a global conspiracy, the country was fertile ground for 

Sachs liked to quote Keynes's warning that "there is no subtler, no surer 
means of overturning the existing basis of society than to debauch the cur- 
rency. The process engages all the hidden forces of economic law on the side 
of destruction." 5 He shared Keynes's view that it was the sacred duty of econ- 
omists to suppress those forces of destruction at all costs. "The thing I got 
from Keynes," Sachs says, "was this deep sadness and sense of risk that things 


can go completely awry. And how incredibly stupid it was of us to leave Ger- 
many in a state of disrepair." 6 Sachs also told journalists that he regarded 
Keynes's lifestyle as a politically engaged, globe-trotting economist as a 
model for his own career. 

Although Sachs shared Keynes's belief in the power of economics to fight 
poverty, he was also a product of Reagan's America, which was, in 1985, in 
the midst of a Friedman-inspired backlash against all that Keynes repre- 
sented. Chicago School precepts about the supremacy of the free market 
had rapidly become the unquestioned orthodoxy in Ivy League economics 
departments, including Harvard's, and Sachs was definitely not immune. He 
admired Friedman's "faith in markets, his constant insistence on proper 
monetary management," calling it "far more accurate than fuzzy structural- 
ist or pseudo-Keynesian arguments one hears a lot in the developing world."' 

Those "fuzzy" arguments were the same ones that in Latin America had 
been suppressed by violence a decade earlier— the conviction that in order 
to escape poverty, the continent needed to break the colonial ownership 
structures with such interventionist policies as land reform, trade protections 
and subsidies, nationalization of natural resources, and cooperatively run 
workplaces. Sachs had little time for such structural changes. So although 
he knew next to nothing about Bolivia and its long history of colonial ex- 
ploitation, the suppression of its indigenous inhabitants and the hard-won 
gains of its 1952 revolution, he was convinced that in addition to hyperinfla- 
tion, Bolivia suffered from "socialist romanticism" — the same delusion of 
developmentalism that an earlier generation of U.S.-trained economists had 
tried to stamp out in the Southern Cone. 8 

Where Sachs parted ways with Chicago School orthodoxy was that he be- 
lieved free-market policies needed to be supported by debt relief and gener- 
ous aid— for the young Harvard economist, the invisible hand was not 
enough. This discrepancy eventually led Sachs to part ways from his more 
laissez-faire colleagues and devote his efforts exclusively to aid. But that split 
was years away. In Bolivia, Sachs's hybrid ideology merely made for some 
strange contradictions. For instance, when he got off the plane in La Paz, 
breathing the thin Andean air for the first time, he imagined himself as a 
latter-day Keynes arriving to save the Bolivian people from the "chaos and 
disorder" of hyperinflation.* Although the core tenet of Keynesianism is that 

* Beating hyperinflation had not saved Germany from depression and then fascism, a contra- 
diction Sachs has never addressed in his persistent use of this analogy. 


countries in severe economic recession should spend money to stimulate the 
economy, Sachs took the opposite approach, advocating government auster- 
ity and price increases in the midst of the crisis— the same recipe for con- 
traction that BusinessWeek had described in Chile as a "Dr. Strangelove 
world of deliberately induced depression." 9 

Sachs's advice to Banzer was straightforward: only sudden shock therapy 
would cure Bolivia's hyperinflation crisis. He proposed raising the price of 
oil tenfold and a range of other price deregulations and budget cuts. In a 
speech to the Bolivian-American Chamber of Commerce, Sachs again pre- 
dicted that hyperinflation could be ended in a day, reporting that "the crowd 
was startled, and delighted, at the prospect." 10 Like Friedman, Sachs was a 
firm believer that, with a sudden policy jolt, "an economy can be reoriented 
from a dead end, a dead end of socialism or a dead end of mass corruption 
or a dead end of central planning, to a normal market economy." 11 

At the time Sachs made these bold promises, the results of Bolivia's elec- 
tions were still up in the air. The former dictator Hugo Banzer was acting as 
if he had won, but his rival in the race, Victor Paz Estenssoro, hadn't yet 
given up. During the campaign, Paz Estenssoro had provided few concrete 
details about how he planned to deal with inflation. But he had served three 
times before as Bolivia's elected president, most recently in 1964, before he 
was overthrown in a coup. It was Paz who had been the face of Bolivia's de- 
velopmentalist transformation, nationalizing the large tin mines, beginning 
to distribute land to indigenous peasants, defending the right of all Bolivians 
to vote. Like Argentina's Juan Peron, Paz was a complicated, omnipresent 
fixture on the political landscape, often switching allegiances abruptly in or- 
der to hold on to power or make a comeback. During the 1985 campaign, an 
aging Paz pledged allegiance to his "nationalist revolutionary" past and 
made vague statements about fiscal responsibility. He was not a socialist, but 
he was no Chicago School neoliberal — or so Bolivians believed. 12 

Since the final decision about who would be named president was up to 
Congress, this was a period of high-stakes backroom negotiations and horse- 
trading between the parties, the Congress and the Senate. One newly 
elected senator ended up playing a pivotal role: Gonzalo Sanchez de 
Lozada (known in Bolivia as Goni). He had lived in the United States for so 
long that he spoke Spanish with a heavy American accent and had returned 
to Bolivia to become one of the country's wealthiest businessmen. He owned 
Comsur, the second-largest private mine in the country, soon to be the 
largest. As a young man, Goni had studied at the University of Chicago, and 


though he was not an economist, he was strongly influenced by Friedman's 
ideas and recognized that they held tremendously profitable implications in 
the mining sector, which in Bolivia was still largely controlled by the state. 
When Sachs laid out his shock plans to Banzer's team, Goni was impressed. 

The details of the backroom negotiations have never been disclosed, but 
the results are clear enough. On August 6, 1985, it was Paz who was sworn in 
as president of Bolivia. Only four days later, Paz appointed Goni to head up 
a top-secret bipartisan emergency economic team charged with radically re- 
structuring the economy. The group's starting point was Sachs's shock ther- 
apy, but it would go much further than anything he had suggested. In fact, it 
would propose dismantling the entire state -centered economic model that 
Paz himself had constructed decades earlier. At this point Sachs was back at 
Harvard, but he says he "was happy to hear that the ADN [Banzer's party] 
had shared a copy of our stabilization plan with the new president and his 
team." 13 

Paz's party had no idea that their leader had struck this backroom deal. 
With the exception of the minister of finance and the minister of planning, 
who were part of the secret group, Paz did not even tell his newly elected 
cabinet about the existence of the emergency economic team. 14 

For seventeen days straight, the emergency team met in the living room of 
Goni s palatial home. "We holed ourselves up there in a cautious and almost 
clandestine way " recalled the planning minister, Guillermo Bedregal, in an 
interview given in 2005, revealing these details for the first time.* 15 What 
they were contemplating was a radical overhaul of a national economy so 
sweeping that nothing like it had ever been attempted in a democracy. Pres- 
ident Paz was convinced that his only hope was to move as fast and suddenly 
as possible. That way, Bolivia's notoriously militant trade unions and peasant 
groups would be caught off guard and wouldn't have a chance to organize a 
response, or so he hoped. As Goni recalled, Paz "kept saying, 'If you are go- 
ing to do it, do it now. I can't operate twice.' " I6 The reason for Paz's post- 
election about-face remains something of a mystery. He died in 2001 and 
never did explain whether he had agreed to adopt Banzer's shock therapy 
program in exchange for being awarded the presidency, or whether he had 

* For two decades, Bolivians did not know how their shock therapy program had been de- 
vised. In August 2005, twenty years after the drafting of the original decree, the Bolivian 
journalist Susan Velasco Portillo interviewed the original members of the emergency eco- 
nomic team, and several of them shared information about the clandestine operation. This 
account is primarily based on those memories. 


undergone a heartfelt ideological conversion. Some insight was provided to 
me by Edwin Corr, the U.S. ambassador to Bolivia at the time. He recalled 
that he had met with all the political parties and made it clear that U.S. aid 
would flow if they went the shock route. 

After seventeen days, Bedregal, the planning minister, had the draft of a 
textbook shock therapy program. It called for the elimination of food subsi- 
dies, the canceling of almost all price controls and a 300 percent hike in the 
price of oil. 17 Despite the fact that life was about to get a lot more expensive 
in an already desperately poor country, the plan froze government wages at 
their already low levels for a year. It also called for deep cuts to government 
spending, flung open Bolivia's borders to unrestricted imports and called for 
a downsizing of state companies, the precursor to privatization. Bolivia had 
missed the neoliberal revolution imposed on the rest of the Southern Cone 
in the seventies; now it was going to make up for lost time. 

When the members of the emergency team had finished drafting the new 
laws, they still weren't ready to share them with Bolivia's elected representa- 
tives, let alone its voters, who had never cast their ballots for such a plan. 
They had one more task to complete. As a group, they drove over to the of- 
fice of the International Monetary Fund's representative in Bolivia and told 
him what they were planning to do. His response was at once encouraging 
and harrowing: "This is what every official at the IMF has dreamed about. 
But if it doesn't work, luckily I have diplomatic immunity and I can catch a 
plane and flee." 18 

The Bolivians proposing the plan had no such escape hatch, and several 
were terrified of how the public was going to react. "They are going to kill 
us," predicted Fernando Prado, the youngest member of the group. Bedre- 
gal, the plan's main author, attempted to stiffen spines by comparing the 
team to fighter pilots attacking an enemy. "We have to be like the pilot of Hi- 
roshima. When he dropped the atomic bomb he didn't know what he was 
doing, but when he saw the smoke he said: 'Oops, sorry!' And that's exactly 
what we have to do, launch the measures and then: Oops, sorry!" 19 

The idea that policy change should be like launching a surprise military 
attack is a recurring theme for economic shock therapists. In Shock and Awe: 
Achieving Rapid Dominance, the U.S. military doctrine published in 1996 
that eventually formed the basis of the 2003 invasion of Iraq, the authors 
state that the invading force should "seize control of the environment and 
paralyze or so overload an adversary's perceptions and understanding of 
events so that the enemy would be incapable of resistance." 20 Economic 


shock works according to a similar theory: the premise is that people can de- 
velop responses to gradual change — a slashed health program here, a trade 
deal there — but if dozens of changes come from all directions at once, a feel- 
ing of futility sets in, and populations go limp. 

Hoping to induce that sense of hopelessness, the Bolivian planners re- 
quired all of their radical measures to he adopted at the same time, and all 
within the first hundred days of the new government. Rather than presenting 
each section of the plan as its own individual law (the new tax code, the new 
pricing law and so on), Paz's team insisted on bundling the entire revolution 
into a single executive decree, D.S. 21060. It contained 220 separate laws 
and covered every aspect of economic life in the country, making it the 
equivalent, in scope and ambition, to "The Brick," the hefty blueprint writ- 
ten by the Chicago Boys in preparation for Pinochet's coup. According to its 
authors, the entire program had to be accepted or rejected; it couldn't be 
amended. It was the economic equivalent of Shock and Awe. 

When the document was complete, the team made five copies: one for 
Paz, one for Goni and one for the treasury minister. The destination of the 
other two copies revealed how certain Paz and his team were that many Bo- 
livians would regard the plan as an act of war: one was for the head of the 
army and the other was for the chief of police. Paz's cabinet, however, was 
still in the dark. They continued to be under the mistaken impression that 
they were working for the same man who had nationalized the mines and re- 
distributed land all those years ago. 

Three weeks after being sworn in as president, Paz finally called his cabi- 
net together to let them in on the surprise he had in store. He ordered the 
doors closed to the governing chambers and "instructed the secretaries to 
hold all of the ministers' telephone calls." Bedregal read the full sixty pages 
to the stunned audience. He was so nervous, he confessed, that he "even got 
a nosebleed only minutes later." Paz informed his cabinet members that the 
decree was not up for debate; in yet another backroom deal, he had already 
secured support from Banzer's right-wing opposition party. If they disagreed, 
he said, they could resign. 

"I don't agree," announced the minister of industry. 

"Please leave," Paz replied. The minister stayed. With inflation still soar- 
ing and strong hints that a shock therapy approach would be rewarded with 
significant financial aid from Washington, no one dared leave. Two days 
later, in a televised presidential address titled "Bolivia Is Dying," Paz 
dropped Bolivia's "Brick" on a completely unsuspecting public. 


Sachs was correct in predicting that price increases would end hyperinfla- 
tion. Within two years, inflation was down to 10 percent, impressive by any 
standard. 21 The broader legacy of Bolivia's neoliberal revolution is far more 
contentious. All economists agree that rapid inflation is enormously damag- 
ing, unsustainable and must be controlled— a process that imposes significant 
pain during the adjustment. The debate is over how a credible program can be 
achieved, as well as who, in any given society, is forced to bear the brunt of that 
pain. Ricardo Grinspun, a professor of economics specializing in Latin Amer- 
ica at York University, explains that an approach in the Keynesian or develop- 
mentalist tradition seeks to mobilize support and share the burden through "a 
negotiated process involving key stakeholders— government, employers, farm- 
ers, unions and so on. In this way, the parties come to agreements over income 
policies, like wages and prices, at the same time that stabilization measures are 
implemented." In sharp contrast, says Grinspun, "the orthodox approach is to 
shift all the social cost onto the poor through shock therapy." That, he told me, 
is precisely what happened in Bolivia. 

Just as Friedman had promised in Chile, freer trade was supposed to cre- 
ate jobs for the newly jobless. It didn't, and the unemployment rate increased 
from 20 percent at the time of the elections to between 25 and 30 percent 
two years later. 22 The state mining corporation alone— the same one that Paz 
had nationalized in the 1950s— was downsized from twenty-eight thousand 
employees to just six thousand. 25 

The minimum wage never recovered its value, and two years into the pro- 
gram, real wages were down 40 percent; at one point they would drop 70 per- 
cent 24 In 1985, the year of shock therapy, the per capita average income in 
Bolivia was $845; two years later it had fallen to $789. This is the measure 
used by Sachs and the government, and despite the lack of progress it con- 
veys, it does not begin to capture the degradation of daily life for many Boli- 
vians. Average income is derived by adding up the country's total income 
and dividing by the number of people in the country; it glosses over the fact 
that shock therapy in Bolivia had the same effects that it had in the rest of the 
region: a small elite grew far wealthier while large portions of what had been 
the working class were discarded from the economy altogether and turned 
into surplus people. In 1987, Bolivian peasants, known as campesinos, were 
earning, on average, just $140 a year, less than one-fifth of the "average in- 
come." 2 ' That is the problem with measuring only the "average": it effec- 
tively erases these sharp divisions. 

A leader of the peasants' union explained that "the government's statistics 


don't reflect the growing number of families forced to live in tents; the thou- 
sands of malnourished kids who get only a piece of bread and a cup of tea 
a day; the hundreds of campesinos who have come to the capital in search of 
work and end up begging on the streets." 26 That was the hidden story of Bo- 
livia's shock therapy: hundreds of thousands of full-time jobs with pensions 
were eliminated, replaced with precarious ones with no protections at all. 
Between 1983 and 1988, the number of Bolivians eligible for social security 
dropped by 61 percent. 27 

Sachs, who returned to Bolivia as an adviser in the midst of the transition, 
opposed raising salaries to keep up with the price of food and gasoline and in- 
stead favored an emergency fund to help the hardest hit— a Band-Aid on what 
had become a gaping wound. Sachs returned to Bolivia at Paz Estenssoro's re- 
quest and was working directly for the president. He is remembered as an un- 
yielding presence. According to Goni (who would later become president of 
Bolivia), Sachs helped to stiffen the resolve of policy makers when public 
pressure was building against the human cost of shock therapy. "In his visits 
[Sachs] said, 'Look, all this gradualist stuff, it just doesn't work. When it really 
gets out of control you've got to stop it, like a medicine. You've got to take 
some radical steps; otherwise your patient is going to die." 28 

One immediate result of this resolve was that many of Bolivia's desper- 
ately poor were pushed to become coca growers, because it paid roughly ten 
times as much as other crops (somewhat of an irony since the original eco- 
nomic crisis was set off by the U.S.-funded siege on the coca farmers.) 29 By 
1989, an estimated one in ten workers was turning to work in some aspect of 
the coca or cocaine industries. 30 These workers would include the family of 
Evo Morales, future president of Bolivia and a former leader of the militant 
coca growers' union. 

The coca industry played a significant role in resuscitating Bolivia's econ- 
omy and beating inflation (a fact now recognized by historians but never 
mentioned by Sachs in explanations of how his reforms triumphed over in- 
flation). 31 Just two years after the "atomic bomb," illegal drug exports were 
generating more income for Bolivia than all its legal exports combined, and 
an estimated 350,000 people were earning a living in some facet of the drug 
trade. "For now," a foreign banker observed, "the Bolivian economy is 
hooked on cocaine." 32 

In the immediate aftermath of shock therapy, few outside Bolivia were talk- 
ing about such complex repercussions. They were telling a far simpler story: 



about a bold, boyish professor from Harvard who had, virtually single- 
handedly, "salvaged the inflation-wracked economy of Bolivia/' according to 
Boston Magazine} 1 The victory over inflation that Sachs had helped engi- 
neer was enough to qualify Bolivia as a stunning free-market success story, 
"the most remarkable of modern times," as The Economist described it. 34 "Bo- 
livia's Miracle" gave Sachs immediate star status in powerful financial circles 
and launched his career as the leading expert on crisis-struck economies, 
sending him on to Argentina, Peru, Brazil, Ecuador and Venezuela in the 
coming years. 

The praise heaped on Sachs was not just about beating inflation in a 
poor country. It was that he had achieved what so many had claimed was 
impossible: he had helped stage a radical neoliberal transformation within 
the confines of a democracy and without a war, a change far more sweeping 
than those attempted by either Thatcher or Reagan. Sachs was fully aware 
of the historical significance of what he had accomplished. "Bolivia was re- 
ally the first, in my view, combination of democratic reform combined with 
economic institutional change," he said years later. "And Bolivia much 
more than Chile showed that you could combine political liberalization 
and democracy with economic liberalization. That's an extremely impor- 
tant lesson, to have both of those working in parallel and each one reinforc- 
ing the other." 35 

The comparison with Chile was not incidental. Thanks to Sachs— 
"evangelist for democratic capitalism," as The New York Times described 
him— shock therapy had finally shaken off the stench of dictatorships and 
death camps that had been clinging to it ever since Friedman made his fate- 
ful trip to Santiago a decade earlier. 36 Sachs had proven, contrary to what the 
critics claimed, that the free-market crusade could not only survive but ride 
the democratic wave now sweeping the world. And Sachs, with his praise for 
Keynes and his unabashedly idealistic commitment to improving the lot of 
the developing world, was the perfect man to steer the crusade into this 
kinder, more peaceful era. 

The Bolivian left had taken to calling Paz's decree pinochetismo 
economico— economic Pinochetism. 37 As far as the business community was 
concerned, both inside and outside Bolivia, that was the whole point: Bolivia 
had brought in Pinochet-style shock therapy, without a Pinochet— and un- 
der a center-left government, no less. As one Bolivian banker put it with ad- 
miration, "The things Pinochet did with a bayonet, Paz has done within a 
democratic system." 38 


The story of the Bolivian miracle has been told and retold, in newspaper 
and magazine articles, in profiles of Sachs, in Sachs's own best-selling book, 
and in documentary productions such as PBS's three-part series Command- 
ing Heights: The Battle for the World Economy. There is one major problem: 
it isn't true. Bolivia did show that shock therapy could be imposed in a coun- 
try that had just had elections, but it did not show that it could be imposed 
democratically or without repression — in fact, it proved, once again, that the 
opposite was still the case. 

First, there was the obvious problem that President Paz had no mandate 
from Bolivian voters to remake the entire economic architecture of the 
country. He had run on a nationalist platform, which he abruptly aban- 
doned in a backroom deal. Some years later, the influential free-market 
economist John Williamson coined a term for what Paz did: he called it 
"voodoo politics"; most people simply call it lying. 39 That was by no means 
the only problem with the democracy narrative. 

Predictably, many of the voters who elected Paz were furious at his be- 
trayal, and as soon as the decree was handed down, tens of thousands took to 
the streets to try to block a plan that would mean layoffs and deepening 
hunger. The major opposition came from the country's main labor federa- 
tion, which called a general strike that brought industry to a halt. Paz's re- 
sponse made Thatcher's treatment of the miners seem tame. He immediately 
declared a "state of siege," and army tanks rolled through the streets of the 
capital, which was placed under a strict curfew. To travel through their own 
country, Bolivian citizens now needed special passes. Riot police raided 
union halls, a university and a radio station, as well as several factories. Politi- 
cal assemblies and marches were forbidden, and state permission was re- 
quired to hold meetings. 40 Oppositional politics was effectively banned — just 
as it had been during the Banzer dictatorship. 

To clear the streets, police arrested fifteen hundred demonstrators, dis- 
persed crowds with tear gas and fired on strikers who they said had attacked 
their officers. 41 Paz also took further measures to make sure that the protests 
stopped for good. With the leaders of the labor federation on a hunger strike, 
Paz directed the police and military to round up the country's top two hundred 
union leaders, load them on planes and fly them to remote jails in the Ama- 
zon 42 According to Reuters, the detainees included "the leadership of the 
Bolivian Labor Federation and other senior trade union officials," and they 
were taken "to isolated villages in the Amazon basin in northern Bolivia, 
where their movements [were] restricted." 43 It was a mass kidnapping, complete 


with a ransom demand: the prisoners would be released only if the unions 
called off their protests, which they eventually agreed to do. Filemon Escobar 
was a miner and labor activist on the streets in those years. In a recent tele- 
phone interview from Bolivia, he recalled that "they plucked the labor leaders 
from the streets and took them to the jungle to be eaten alive by the bugs. 
When they were released, the new economic plan was in place." According to 
Escobar, "The government didn't take people to the jungle to be tortured or 
killed, but so that they could go ahead with their economic plan." 

This extraordinary state of siege stayed in place for three months, and 
since the plan was pushed through in one hundred days, that meant the 
country was under lockdown during the decisive shock therapy period. One 
year later, when the Paz government moved ahead with mass layoffs in the tin 
mines, the unions once again took to the streets, and the same series of dra- 
matic events unfolded: a state of siege was declared, and two Bolivian Air 
Force planes carried one hundred of the country's top labor leaders to intern- 
ment camps in Bolivia's tropical flatlands. This time, the kidnapped leaders 
included two former labor ministers and a former senator— recalling 
Pinochet's "VIP prison" in Southern Chile where Orlando Letelier had been 
taken. The leaders were held in the camps for two and half weeks until, once 
again, the unions agreed to call off their protests and hunger strike. 44 

It was a kind of junta lite. In order for the regime to impose economic 
shock therapy, certain people needed to disappear— if only temporarily. 
Though certainly less brutal, these disappearances served the same purpose 
as they had in the seventies. Interning Bolivia's trade unionists so that they 
could not resist the reforms cleared the path for the economic erasure of 
whole sectors of workers; their jobs were soon lost, and they ended up ware- 
housed in the shantytowns and slums surrounding La Paz. 

Sachs had gone to Bolivia quoting Keynes's warning about economic col- 
lapse breeding fascism, but he had proceeded to prescribe measures so 
painful that quasi-fascist measures were required for their enforcement. 

The Paz government's crackdown was covered in the international press at 
the time, but only as a one- or two-day news story about generic riots in Latin 
America. When it came time to tell the tale of the triumph of "free-market 
reforms" in Bolivia, however, the events did not make it into the narrative 
(much as the symbiosis of Pinochet's violence and Chile's "economic mira- 
cle" is so often omitted). Jeffrey Sachs, of course, is not the one who called in 
the riot police or declared the state of siege, but he does devote a chapter of 
his book The End of Poverty to Bolivia's victory over inflation, and while he 


seems happy to take a share of the credit, he makes no mention of the re- 
pression required to carry out the plan. The closest he comes is an oblique 
reference to "tense moments in the early months of the stabilization pro- 
gram. ^ 

In other accounts, even that admission is erased. Goni went so far as to 
claim that "stabilization had been achieved in a democracy without going 
against people's human liberties, letting people express themselves." 46 A less 
idealized assessment came from a minister in the Paz government, who said 
that they "behaved like authoritarian pigs." 47 

That dissonance may be the most lasting legacy of Bolivia's shock therapy 
experiment. Bolivia had shown that wrenching shock therapy still needed to 
be accompanied by shocking attacks on inconvenient social groups and on 
democratic institutions. It also showed that the corporatist crusade could ad- 
vance by these baldly authoritarian means and still be applauded as demo- 
cratic because elections had taken place, regardless of how completely civil 
liberties were suppressed in the aftermath or how fully democratic wishes 
were ignored. (It was a lesson that would prove particularly handy for Rus- 
sia's Boris Yeltsin, among other leaders, in the years to come.) In this way, 
Bolivia provided a blueprint for a new, more palatable kind of authoritarian- 
ism, a civilian coup d'etat, one carried out by politicians and economists in 
business suits rather than soldiers in military uniforms— all unfolding within 
the official shell of a democratic regime. 




Well, what is the sense of ruining my head and erasing my mem- 
ory, which is my capital, and putting me out of business? It was a 
brilliant cure but we lost the patient. 

—Ernest Hemingway on his electroshock therapy, shortly before 
committing suicide, 1 96 1 1 

For Jeffrey Sachs, the lesson of his first international adventure was that hy- 
perinflation could indeed be stopped in its tracks, with the right tough and 
drastic measures. He had gone to Bolivia to slay inflation and he had done it. 
Case closed. 

John Williamson, one of the most influential right-wing economists in 
Washington and a key adviser to the IMF and the World Bank, was watching 
Sachs's experiment closely, and he saw something of far greater significance 
in Bolivia. He described the shock therapy program as "the big bang" 
moment— a breakthrough in the campaign to bring the Chicago School 
doctrine to the entire globe. 2 The reason had little to do with economics and 
everything to do with tactics. 

It may not have been his intention, but in quite spectacular fashion Sachs 
had proven that Friedman's theory about crisis was absolutely correct. Bo- 
livia's hyperinflation meltdown was the excuse that was needed to push 
through a program that would have been politically impossible under nor- 
mal circumstances. Here was a country with a strong, militant labor move- 
ment and a powerful left tradition, site of Che Guevara's last stand. Yet it had 


been forced to accept draconian shock therapy in the name of stabilizing its 
out-of-control currency. 

By the mid-eighties, several economists had observed that a true hyperin- 
flation crisis simulates the effects of a military war— spreading fear and con- 
fusion, creating refugees and causing large loss of life. 3 It was strikingly clear 
that in Bolivia, hyperinflation had played the same role as had Pinochet's 
"war" in Chile and the Falklands War for Margaret Thatcher— it had cre- 
ated the context for emergency measures, a state of exception during which 
the rules of democracy could be suspended and economic control could be 
temporarily handed over to the team of experts in Goni's living room. For 
hard-core Chicago School ideologues like Williamson, that meant that hy- 
perinflation was not a problem to be solved, as Sachs believed, but a golden 
opportunity to be seized. 

There was no shortage of such opportunities in the eighties. In fact, much 
of the developing world, but particularly Latin America, was at that very mo- 
ment spiraling into hyperinflation. The crisis was the result of two main fac- 
tors, both with roots in Washington financial institutions. The first was their 
insistence on passing on illegitimate debts accumulated under dictatorships 
to new democracies. The second was the Friedman-inspired decision at the 
U.S. Federal Reserve to allow interest rates to soar, which massively in- 
creased the size of those debts overnight. 

Passing on Odious Debts 

Argentina was a textbook case. In 1983, when the junta collapsed after the 
Falklands War, Argentines elected Raul Alfonsm as their new president. The 
newly liberated country was rigged to detonate, thanks to the planting of a so- 
called debt bomb. As part of what the outgoing junta had termed a "dignified 
transition" to democracy, Washington insisted that the new government agree 
to pay off the debts amassed by the generals. During junta rule, Argentina's ex- 
ternal debt had ballooned from $7.9 billion the year before the coup to $45 
billion at the time of the handover— debts owed to the International Monetary 
Fund, the World Bank, the U.S. Export-Import Bank and private banks based 
in the U.S. It was much the same across the region. In Uruguay, the junta took 
a debt of half a billion dollars when it seized power and expanded it to $5 bil- 
lion, a huge load in a country of only 3 million people. In Brazil, the most dra- 
matic case, the generals, who came to power in 1964 promising financial 
order, managed to take the debt from $3 billion to $103 billion in 198 5. 4 


At the time of the transitions to democracy, powerful arguments were 
made, both moral and legal, that these debts were "odious" and that newly 
liberated people should not be forced to pay the bills of their oppressors and 
tormentors. The case was especially strong in the Southern Cone because so 
much of the foreign credit had gone straight to the military and police dur- 
ing the dictatorship years— to pay for guns, water cannons and state-of-the- 
art torture camps. In Chile, for instance, the loans bankrolled a tripling in 
military spending, enlarging Chile's army from forty-seven thousand in 1973 
to eighty-five thousand in 1980. In Argentina, the World Bank estimates that 
roughly $10 billion of the money borrowed by the generals went to military 
purchases. 5 

Much of what wasn't spent on weapons simply vanished. A culture of cor- 
ruption permeated junta rule— a glimpse of the debauched future to come 
when the same free-wheeling economic policies spread to Russia, China and 
the "free fraud zone" of occupied Iraq (to borrow a phrase from a disaffected 
U.S. adviser). 6 According to a 2005 U.S. Senate report, Pinochet maintained 
a byzantine web of at least 125 secret foreign bank accounts listed under the 
names of various family members and combinations of his own name. The 
accounts, the most notorious of which were at the Washington, D.C. -based 
Riggs Bank, hid an estimated $27 million. 7 

In Argentina, the junta has been accused of being even more acquisitive. 
In 1984, Jose Martinez de Hoz, architect of the economic program, was ar- 
rested on fraud charges relating to a massive state subsidy to one of the com- 
panies he used to head (the case was later dismissed). 8 The World Bank, 
meanwhile, later tracked what happened to $35 billion in foreign loans bor- 
rowed by the junta and found that $19 billion— 46 percent of the total— was 
moved offshore. Swiss officials have confirmed that much of it ended up in 
numbered accounts. 9 The U.S. Federal Reserve observed that in 1980 alone, 
Argentina's debt expanded by $9 billion; in that same year, the amount of 
money deposited abroad by Argentine citizens increased by $6.7 billion. 10 
Larry Sjaastad, a famed University of Chicago professor who personally 
trained many of Argentina's Chicago Boys, has described these missing bil- 
lions (stolen under the noses of his students) as "the greatest fraud of the 
twentieth century."* 11 

The junta embezzlers even enlisted their victims in these crimes. At the 

* It may well have been at the time, but the century was not over— Russia's Chicago School 
experiment was to come. 


ESMA torture center in Buenos Aires, prisoners with strong language skills 
or university educations were regularly pulled out of their cells to perform 
clerical tasks for their captors. One survivor, Graciela Daleo, was instructed 
to type a document advising officers on offshore tax havens for the money 
they were embezzling. 12 

The remainder of the national debt was mostly spent on interest pay- 
ments, as well as shady bailouts for private firms. In 1982, just before Ar- 
gentina's dictatorship collapsed, the junta did one last favor for the corporate 
sector. Domingo Cavallo, president of Argentina's central bank, announced 
that the state would absorb the debts of large multinational and domestic 
firms that had, like Chile's piranhas, borrowed themselves to the verge of 
bankruptcy. The tidy arrangement meant that these companies continued to 
own their assests and profits, but the public had to pay off between $15 and 
$20 billion of their debts; among the companies to receive this generous 
treatment were Ford Motor Argentina, Chase Manhattan, Citibank, IBM 
and Mercedes-Benz. 13 

Those who favored defaulting on these illegitimately accumulated 
debts argued that the lenders knew, or ought to have known, that the 
money was being spent on repression and corruption. This case was bol- 
stered recently when the State Department declassified the transcript of a 
meeting held on October 7, 1976, between Henry Kissinger, then secre- 
tary of state, and Argentina's foreign minister under the military dictator- 
ship, the admiral Cesar Augusto Guzzetti. After discussing the 
international human rights outcry following the coup, Kissinger said, 
"Look, our basic attitude is that we would like you to succeed. I have an 
old-fashioned view that friends ought to be supported. . . . The quicker you 
succeed, the better." Kissinger then moved on to the topic of loans, en- 
couraging Guzzetti to apply for as much foreign assistance as possible and 
fast, before Argentina's "human rights problem" tied the hands of the U.S. 
administration. "There are two loans in the bank," Kissinger said, referring 
to the Inter-American Development Bank. "We have no intention of voting 
against them." He also instructed the minister, "Proceed with your Export- 
Import Bank requests. We would like your economic program to succeed 
and we will do our best to help you." 14 

The transcript proves that the U.S. government approved loans to the 
junta knowing they were being used in the midst of a campaign of terror. In 
the early eighties, it was these odious debts that Washington insisted Ar- 
gentina's new democratic government had to repay. 


The Debt Shock 

On their own, the debts would have been an enormous burden on the new 
democracies, but that burden was about to get much heavier. A new kind of 
shock was in the news: the Volcker Shock. Economists used this term to de- 
scribe the impact of the decision made by Federal Reserve chairman Paul 
Volcker when he dramatically increased interest rates in the United States, 
letting them rise as high as 21 percent, reaching a peak in 1981 and lasting 
through the mid-eighties. 15 In the U.S., rising interest rates led to a wave of 
bankruptcies, and in 1983 the number of people who defaulted on their 
mortgages tripled. 16 

The deepest pain, however, was felt outside the U.S. In developing coun- 
tries carrying heavy debt loads, the Volcker Shock— also known as the "debt 
shock" or the "debt crisis"— was like a giant Taser gun fired from Washing- 
ton, sending the developing world into convulsions. Soaring interest rates 
meant higher interest payments on foreign debts, and often the higher pay- 
ments could only be met by taking on more loans. The debt spiral was born. 
In Argentina, the already huge debt of $45 billion passed on by the junta 
grew rapidly until it reached $65 billion in 1989, a situation reproduced in 
poor countries around the world. 17 It was after the Volcker Shock that 
Brazil's debt exploded, doubling from $50 billion to $100 billion in six years. 
Many African countries, having borrowed heavily in the seventies, found 
themselves in similar straits: Nigeria's debt in the same short time period 
went from $9 billion to $29 billion. 18 

These were not the only economic shocks zapping the developing world 
in the eighties. A "price shock" occurs every time the price of an export com- 
modity like coffee or tin drops by 10 percent or more. According to the IMF, 
developing countries experienced 25 such shocks between 1981 and 1983; 
between 1984 and 1987, the height of the debt crisis, they experienced 140 
such shocks, pushing them deeper into debt. 19 One hit Bolivia in 1986, the 
year after it had swallowed Jeffrey Sachs's bitter medicine and submitted to a 
capitalist makeover. The price of tin, Bolivia's major export other than coca, 
dropped by 55 percent, devastating the country's economy through no fault 
of its own. (This was precisely the kind of dependence on raw resource ex- 
ports that developmentalist economics had been trying to transcend in the 
fifties and sixties — an idea dismissed as "fuzzy" by the Northern economic 

This is where Friedman's crisis theory became self-reinforcing. The more 


the global economy followed his prescriptions, with floating interest rates, 
deregulated prices and export-oriented economies, the more crisis-prone the 
system became, producing more and more of precisely the type of melt- 
downs he had identified as the only circumstances under which govern- 
ments would take more of his radical advice. 

In this way, crisis is built into the Chicago School model. When limitless 
sums of money are free to travel the globe at great speed, and speculators are 
able to bet on the value of everything from cocoa to currencies, the result is 
enormous volatility. And, since free-trade policies encourage poor countries 
to continue to rely on the export of raw resources such as coffee, copper, oil 
or wheat, they are particularly vulnerable to getting trapped in a vicious cir- 
cle of continuing crisis. A sudden drop in the price of coffee sends entire 
economies into depression, which is then deepened by currency traders 
who, seeing a country's financial downturn, respond by betting against its 
currency, causing its value to plummet. When soaring interest rates are 
added, and national debts balloon overnight, you have a recipe for potential 
economic mayhem. 

Chicago School believers tend to portray the mid-eighties onward as a 
smooth and triumphant victory march for their ideology: at the same time 
that countries were joining the democratic wave, they had the collective 
epiphany that free people and unfettered free markets go hand in hand. 
That epiphany was always fictional. What actually happened is that just as 
citizens were finally winning their long-denied freedoms, escaping the shock 
of the torture chambers under the likes of the Philippines' Ferdinand Marcos 
and Uruguay's Juan Maria Bordaberry, they were hit with a perfect storm of 
financial shocks — debt shocks, price shocks and currency shocks— created 
by the increasingly volatile, deregulated global economy. 

Argentina's experience of how the debt crisis was compounded by these 
other shocks was, unfortunately, typical. Raul Alfonsm took office in 1983, 
in the midst of the Volcker Shock, which placed the new government in cri- 
sis mode from day one. In 1985, inflation was so bad that Alfonsm was 
forced to unveil a brand-new currency, the austral, gambling that a fresh 
start would allow him to regain control. Within four years, prices had soared 
so high that massive food riots broke out, and Argentine restaurants were us- 
ing the currency as wallpaper because it was cheaper than paper. In June 
1989, with inflation up 203 percent that month alone, and five months be- 
fore his term was set to expire, Alfonsm gave up: he resigned and called early 
elections. 20 



Other options were available to politicians in Alfonsm's position. He 
could have defaulted on Argentina's huge debts. He could have joined with 
neighboring governments in the same crisis and formed a debtors' cartel. 
These governments could have created a common market based on devel- 
opmentalist principles, a process that had begun when the region was torn 
apart by sadistic military regimes. But part of the challenge at the time had to 
do with the legacy of state terror faced by new democracies. In the eighties 
and nineties, much of the developing world was in the grip of a kind of ter- 
ror hangover, free on paper but still cautious and wary. Having finally es- 
caped the darkness of dictatorship, few elected politicians were willing to 
risk inviting another round of U.S.-supported coups d'etat by pushing the 
very policies that had provoked the coups of the seventies — especially when 
the military officials who had staged them were, for the most part, not in 
prison but, having negotiated immunity, in their barracks, watching. 

Understandably unwilling to go to war with the Washington institutions 
that owned their debts, crisis-struck new democracies had little choice but to 
play by Washington's rules. And then, in the early eighties, Washington's 
rules got a great deal stricter. That's because the debt shock coincided pre- 
cisely, and not coincidentally, with a new era in North-South relations, one 
that would make military dictatorships largely unnecessary. It was the dawn 
of the era of "structural adjustment" — otherwise known as the dictatorship of 

Philosophically, Milton Friedman did not believe in the IMF or the World 
Bank: they were classic examples of big government interfering with the del- 
icate signals of the free market. So it was ironic that there was a virtual con- 
veyor belt delivering Chicago Boys to the two institutions' hulking 
headquarters on Nineteenth Street in Washington, D.C., where they took up 
many of the top positions. 

Arnold Harberger, who headed the University of Chicago's Latin America 
program, often brags about how many of his graduates landed powerful jobs 
at the World Bank and the IMF. "There was one moment in time when four 
regional chief economists at the World Bank had been my students in 
Chicago. One of them, Marcelo Selowsky, went off to be the chief econo- 
mist for the newly minted ex-Soviet empire area, which is the biggest such 
job in the whole Bank. And guess what? He was replaced by yet another for- 
mer student, Sebastian Edwards. So it's very nice to see these people moving 
up, and I'm proud to have played a part in their development as economists." 21 


Another star was Claudio Loser, an Argentine who graduated from the Uni- 
versity of Chicago in 1971 and went on to become director of the Western 
Hemisphere Department of the IMF, the most senior post dealing with Latin 
America.* Chicagoans occupied many other senior IMF posts as well, in- 
cluding the second-highest position, first deputy managing director, as well 
as chief economist, director of research and senior economist of the African 
Department. 22 

Friedman may have opposed the institutions on philosophical grounds, 
but practically, there were no institutions better positioned to implement his 
crisis theory. When countries were sent spiraling into crisis in the eighties, 
they had nowhere else to turn but the World Bank and the IMF. When they 
did, they hit a wall of orthodox Chicago Boys, trained to see their economic 
catastrophes not as problems to solve but as precious opportunities to lever- 
age in order to secure a new free-market frontier. Crisis opportunism was 
now the guiding logic of the world's most powerful financial institutions. It 
was also a fundamental betrayal of their founding principles. 

Like the UN, the World Bank and the IMF were created in direct re- 
sponse to the horror of the Second World War. With the goal of never again 
repeating the mistakes that had allowed fascism to rise in the heart of Eu- 
rope, the world powers came together in 1944 in Bretton Woods, New 
Hampshire, to create a new economic architecture. The World Bank and 
the IMF, financed through contributions by their initial forty-three member 
countries, were given the explicit mandate to prevent future economic 
shocks and crashes like the ones that had so destabilized Weimar Germany. 
The World Bank would make long-term investments in development to pull 
countries out of poverty, while the IMF would act as a kind of global shock 
absorber, promoting economic policies that reduced financial speculation 
and market volatility. When a country looked as though it was falling into 
crisis, the IMF would leap in with stabilizing grants and loans, thereby pre- 
venting crises before they occurred. 23 The two institutions, located across 
the street from each other in Washington, would coordinate their responses. 

John Maynard Keynes, who headed the U.K. delegation, was convinced 
that the world had finally recognized the political perils of leaving the mar- 

* Loser was fired after Argentina's 2001 collapse. The consensus was that the IMF under his 
watch was so enamored of free-market policies that, as long as countries kept cutting 
spending and privatizing their economies, it continued to lavish loans on them, overlooking 
glaring weaknesses in their economies, such as mass unemployment and rampant 
corruption— not to mention unsustainable debt to the IMF. 



ket to regulate itself. "Few believed it possible/' Keynes said at the confer- 
ence's end. But if the institutions stayed true to their founding principles, 
"the brotherhood of man will have become more than a phrase." 24 

The IMF and the World Bank did not live up to that universal vision; from 
the start they allocated power not on the basis of "one country, one vote " like 
the UN General Assembly, but rather on the size of each country's 
economy— an arrangement that gives the United States an effective veto 
over all major decisions, with Europe and Japan controlling most of the rest. 
That meant that when Reagan and Thatcher came to power in the eighties, 
their highly ideological administrations were essentially able to harness the 
two institutions for their own ends, rapidly increasing their power and turn- 
ing them into the primary vehicles for the advancement of the corporatist 

The colonization of the World Bank and the IMF by the Chicago School 
was a largely unspoken process, but it became official in 1989 when John 
Williamson unveiled what he called "the Washington Consensus." It was a 
list of economic policies that he said both institutions now considered the 
bare minimum for economic health — "the common core of wisdom em- 
braced by all serious economists." 25 These policies, masquerading as techni- 
cal and uncontentious, included such bald ideological claims as all "state 
enterprises should be privatized" and "barriers impeding the entry of foreign 
firms should be abolished." 26 When the list was complete, it made up noth- 
ing less than Friedman's neoliberal triumvirate of privatization, deregula- 
tion/free trade and drastic cuts to government spending. These were the 
policies, Williamson said, "that were being urged on Latin America by the 
powers-that-be in Washington." 27 Joseph Stiglitz, former chief economist of 
the World Bank and one of the last holdouts against the new orthodoxy, 
wrote that "Keynes would be rolling over in his grave were he to see what has 
happened to his child." 28 

Officials with the World Bank and the IMF had always made policy recom- 
mendations when they handed out loans, but in the early eighties, embold- 
ened by the desperation of developing countries, those recommendations 
morphed into radical free-market demands. When crisis-struck countries 
came to the IMF seeking debt relief and emergency loans, the fund responded 
with sweeping shock therapy programs, equivalent in scope to "The Brick" 
drafted by the Chicago Boys for Pinochet and the 220-law decree cooked up in 
Goni ? s living room in Bolivia. 

The IMF issued its first full-fledged "structural adjustment" program in 


1983. For the next two decades, every country that came to the fund for a 
major loan was informed that it needed to revamp its economy from top to 
bottom. Davison Budhoo, an IMF senior economist who designed structural 
adjustment programs in Latin America and Africa throughout the eighties, 
admitted later that "everything we did from 1983 onward was based on our 
new sense of mission to have the south 'privatised' or die; towards this end we 
ignominiously created economic bedlam in Latin America and Africa in 
1983-88." 29 

Despite this radical (and highly profitable) new mission, the IMF and the 
bank always claimed that everything they did was in the interest of stabiliza- 
tion. The fund's official mandate was still crisis prevention — not social engi- 
neering or ideological transformation — so stabilization needed to be the 
official rationale. The reality was that in country after country, the interna- 
tional debt crisis was being methodically leveraged to advance the Chicago 
School agenda, based on a ruthless application of Friedman's shock doc- 

Economists at the World Bank and the IMF admitted this at the time, al- 
though the admissions were generally made in coded economic language 
and restricted to specialized forums and publications for fellow "tech- 
nocrats." Dani Rodrik, a renowned Harvard economist who worked exten- 
sively with the World Bank, described the entire construct of "structural 
adjustment" as an ingenious marketing strategy. "The World Bank must be 
given credit," Rodrik wrote in 1994, "for having invented and successfully 
marketed the concept of 'structural adjustment,' a concept that packaged to- 
gether microeconomic and macroeconomic reforms. Structural adjustment 
was sold as the process that countries needed to undergo in order to save their 
economies from the crisis. For governments that bought into the package, the 
distinction between sound macroeconomic policies that maintain external 
balance and stable prices, on the one hand, and policies that determine 
openness [like free trade], on the other, was obfuscated." 30 

The principle was simple: countries in crisis desperately need emergency 
aid to stabilize their currencies. When privatization and free-trade policies 
are packaged together with a financial bailout, countries have little choice 
but to accept the whole package. The really clever part was that the econo- 
mists themselves knew that free trade had nothing to do with ending a crisis, 
but that information was expertly "obfuscated." Rodrik meant his comment 
as a compliment. Not only did this bundling work in getting poor countries 
to accept the policies selected for them by Washington, but it was the only 



thing that worked— and Rodrik had the numbers to back up his claim. He 
had studied all the countries that adopted radical free-trade policies in the 
eighties and found that "no significant case of trade reform in a developing 
country in the 1980s took place outside the context of a serious economic 
crisis." 31 

It was a staggering admission. At this point in history, the bank and the 
fund were publicly insisting that governments the world over had seen the 
light and realized that the Washington Consensus policies were the only 
recipe for stability, and therefore democracy. Yet here was an acknowledg- 
ment, made inside the Washington establishment, that developing countries 
were submitting to them only through a combination of false pretenses and 
bald extortion: Want to save your country? Sell it off. Rodrik even conceded 
that privatization and free trade— two central pieces of the structural adjust- 
ment package— had no direct link with creating stability. To argue other- 
wise, according to Rodrik, was "bad economics." 32 

Argentina— the "model student" of the IMF in this period— once again 
offers a clear window into the mechanics of the new order. After the hyper- 
inflation crisis forced President Alfonsfn to resign, he was replaced by Carlos 
Menem, a Peronist governor from a small province who wore leather jackets, 
had muttonchop sideburns and seemed tough enough to stand up to both 
the still-ominous military and the creditors. After all the violent attempts that 
had been made to erase the Peronist party and the trade union movement, 
Argentina now had a president who had run a pro-union campaign promis- 
ing to revive Juan Peron's nationalist economic policies. It was a moment 
with many of the same emotional echoes as Paz's inauguration in Bolivia. 

Too many, as it turned out. After a year in office, and under intense pres- 
sure from the IMF, Menem embarked on a defiant course of "voodoo poli- 
tics." Elected as the symbol of the party that had opposed the dictatorship, 
Menem appointed Domingo Cavallo as his economy minister, bringing 
back to power the junta-era official responsible for bailing out the debts of 
the corporate sector— the dictatorship's parting gift. 33 His appointment was 
what economists call "a signal"— an unmistakable indication, in this case, 
that the new government would pick up and continue the corporatist exper- 
iment started by the junta. The Buenos Aires stock market responded with 
the equivalent of a standing ovation: a 30 percent spike in trading on the day 
Cavallo's name was announced. 34 

Cavallo immediately called for ideological reinforcements, stacking the 
government with former students of Milton Friedman and Arnold Harberger. 


Virtually all the country's top economic posts were filled by Chicago Boys: 
president of the central bank was Roque Fernandez, who had worked at both 
the IMF and the World Bank; vice president of the central bank was Pedro 
Pou, a Chicago Boy who had worked for the dictatorship; the chief central 
bank adviser was the Pablo Guidotti, who came directly from his job work- 
ing at the IMF under another former University of Chicago professor, 
Michael Mussa. 

Argentina was not unique in this regard. By 1999, the Chicago School in- 
ternational alumni included more than twenty-five government ministers and 
more than a dozen central bank presidents from Israel to Costa Rica, an ex- 
traordinary level of influence for one university department. 35 In Argentina, 
as in so many other countries, the Chicago Boys formed a kind of ideological 
pincer around the elected government, one group squeezing from within, an- 
other exerting its pressure from Washington. For instance, the IMF delega- 
tions to Buenos Aires were often led by Claudio Loser, the Argentine Chicago 
Boy, which meant that when he met with the finance ministry and the central 
bank, the meetings were not adversarial negotiations but collegial discussions 
among friends, former classmates at the University of Chicago and recent 
coworkers on Nineteenth Street. A book published in Argentina about the ef- 
fect of this global economic fraternity is aptly titled Buenos Muchachos, a ref- 
erence to Martin Scorsese's mafia classic, Goodfellas} 6 

The members of this fraternity were in enthusiastic agreement about what 
needed to be done with Argentina's economy— and how to pull it off. The 
Cavallo Plan, as it came to be called, was based on the clever packaging trick 
that both the World Bank and the IMF had perfected: harnessing the chaos 
and desperation of a hyperinflation crisis to pass privatization off as an inte- 
gral part of the rescue mission. So, to stabilize the money system, Cavallo 
quickly made massive cuts to public spending and launched another new 
currency, the Argentine peso, pegged to the U.S. dollar. Within a year, infla- 
tion was down to 17.5 percent and was virtually eliminated a few years 
later. 5 This dealt with the runaway currency but "obfuscated" the other half 
of the program. 

Argentina's dictatorship, for all its commitment to pleasing foreign in- 
vestors, had left large and desirable pieces of the economy in state hands, 
from the national airline to Patagonia's impressive oil reserves. As far as Cav- 
allo and his Chicago Boys were concerned, the revolution was only half fin- 
ished, and they were determined to use the economic crisis to complete their 



In the early nineties, the Argentine state sold off the riches of the country 
so rapidly and so completely that the project far surpassed what had taken 
place in Chile a decade earlier. By 1994, 90 percent of all state enterprises 
had been sold to private companies, including Citibank, Bank Boston, 
France's Suez and Vivendi, Spain's Repsol and Telefonica. Before making 
the sales, Menem and Cavallo had generously performed a valuable service 
for the new owners: they had fired roughly 700,000 of their workers, accord- 
ing to Cavallo s own estimates; some put the number much higher. The oil 
company alone lost 27,000 workers during the Menem years. An admirer of 
Jeffrey Sachs, Cavallo called this process "shock therapy." Menem had an 
even more brutal phrase for it: in a country still traumatized by mass torture, 
he called it "major surgery without anesthetic."* 38 

In the midst of the transformation, Time magazine put Menem on its 
cover, his face grinning out of the middle of a sunflower, under the headline 
"Menem's Miracle." 39 And it was a miracle— Menem and Cavallo had 
pulled off a radical and painful privatization program without sparking a na- 
tional revolt. How had they done it? 

Years later, Cavallo explained. "At the time of hyperinflation it's terrible 
for the people, particularly for low-income people and small savers, because 
they see that in a few hours or in a few days they are being told their salaries 
got destroyed by the price increases, which take place at an incredible speed. 
That is why the people ask the government, 'Please do something.' And if the 
government comes with a good stabilization plan, that is the opportunity to 
also accompany that plan with other reforms ... the most important reforms 
were related to the opening up of the economy and to the deregulation and 
the privatization process. But the only way to implement all those reforms 
was, at that time, to take advantage of the situation created by hyperinflation, 
because the population was ready to accept drastic changes in order to elim- 
inate hyperinflation and to go back to normality." 40 

* In January 2006, long after Cavallo and Menem were out of office, Argentines received 
some surprising news. It turned out that the Cavallo Plan wasn't Cavallo 's at all, nor was it 
the IMF's: Argentina's entire early-nineties shock therapy program was written in secret by 
JP Morgan and Citibank, two of Argentina's largest private creditors. In the course of a Law- 
suit against the Argentine government, the noted historian Alejandro Olmos Gaona uncov- 
ered a jaw-dropping 1 , 400-page document written by the two U.S. banks for Cavallo in which 
"the policies carried out by the government from '92 on are drawn up . . . the privatization of 
utilities, the labour law reform, the privatization of the pension system. It is all laid out with 
great attention to detail. . . . Everyone believes that the economic plan pursued since 1992 
was Domingo Cavallo's creation, but that's not the way it is." 


In the long term, Cavallo's program in its entirety would prove disastrous 
for Argentina. His method of stabilizing the currency— pegging the peso to 
the U.S. dollar— made it so expensive to produce goods inside the country 
that local factories could not compete with the cheap imports flooding the 
country. So many jobs were lost that well over half the country would even- 
tually be pushed below the poverty line. In the short term, however, the plan 
worked brilliantly: Cavallo and Menem had smuggled privatization in while 
the country was in shock from hyperinflation. Crisis had done its job. 

What Argentina's leaders pulled off in this period was a psychological 
more than an economic technique. As Cavallo, a junta veteran, well under- 
stood, in moments of crisis, people are willing to hand over a great deal of 
power to anyone who claims to have a magic cure— whether the crisis is a fi- 
nancial meltdown or, as the Bush administration would later show, a terrorist 

And that is how the crusade that Friedman began managed to survive the 
dreaded transition to democracy— not by its proponents persuading elec- 
torates of the wisdom of their worldview, but by moving deftly from crisis to 
crisis, expertly exploiting the desperation of economic emergencies to push 
through policies that would tie the hands of fragile new democracies. Once 
the tactic was perfected, opportunities just seemed to multiply. The Volcker 
Shock would be followed by the Mexican Tequila Crisis in 1994, the Asian 
Contagion in 1997 and the Russian Collapse in 1998, which was followed 
shortly afterward by one in Brazil. When these shocks and crises started to 
lose their power, even more cataclysmic ones would appear: tsunamis, hurri- 
canes, wars and terrorist attacks. Disaster capitalism was taking shape. 




These worst of times give rise to the best of opportuni- 
ties for those who understand the need for fundamen- 
tal economic reform. 

— Stephan Haggard and John Williamson, The Political 
Economy of Policy Reform, 1994 




I live in a Poland that is now free, and I consider Milton Friedman 
to be one of the main intellectual architects of my country's 

— Leszek Balcerowicz, former finance minister of Poland, Novem- 
ber 2006 1 

There's a certain chemical that gets released in your stomach 
when you make ten times your money. And it's addictive. 

—William Browder, a U.S. money manager, on investing in Poland 
in the early days of capitalism 2 

We certainly must not stop eating for fear of choking. 

—People's Daily, the official state newspaper, on the need to con- 
tinue free-market reforms after the Tiananmen Square massacre 3 

Before the Berlin Wall fell, becoming the defining symbol of the collapse of 
Communism, there was another image that held out the promise of Soviet 
barriers coming down. It was Lech Walesa, a laid-off electrician with a han- 
dlebar moustache and disheveled hair, climbing over a steel fence festooned 
with flowers and flags in Gdansk, Poland. The fence protected the Lenin 
shipyards and the thousands of workers who had barricaded themselves in- 
side to protest a Communist Party decision to raise the price of meat. 

The workers' strike was an unprecedented show of defiance against the 
Moscow-controlled government, which had ruled Poland for thirty-five 


years. No one knew what would happen: Would Moscow send tanks? Would 
they fire on the strikers and force them to work? As the strike wore on, the 
shipyard became a pocket of popular democracy within an authoritarian 
country, and the workers expanded their demands. They no longer wanted 
their work lives controlled by party apparatchiks claiming to speak for the 
working class. They wanted their own independent trade union, and they 
wanted the right to negotiate, bargain and strike. Not waiting for permission, 
they voted to form that union and called it Solidarnos'c, Solidarity. 4 That was 
1980, the year the world fell in love with Solidarity and with its leader, Lech 

Walesa, then thirty-six, was so in tune with the aspirations of Poland's 
workers that they seemed in spiritual communion, "We eat the same bread!" 
he bellowed into the microphone in the Gdansk shipyard. It was a reference 
not only to Walesa's own unassailable blue-collar credentials but also to the 
powerful role that Catholicism played in this trail-blazing new movement. 
With religion frowned upon by party officials, the workers wore their faith as 
a badge of courage, lining up to take Communion behind the barricades. 
Walesa, a bracing mix of bawdy and pious, opened the Solidarity office with 
a wooden crucifix in one hand and a bouquet of flowers in the other. When 
it came time to sign the first landmark labor agreement between Solidarity 
and the government, Walesa marked his name with "a giant souvenir pen 
bearing the likeness of John Paul II." The admiration was mutual; the Polish 
pope told Walesa that his prayers were with Solidarity.' 

Solidarity spread through the country's mines, shipyards and factories 
with ferocious speed. Within a year, it had 10 million members — almost half 
of Poland's working-age population. Having won the right to bargain, Soli- 
darity started making concrete headway: a five-day work week instead of six, 
and more say in the running of factories. Tired of living in a country that 
worshipped an idealized working class but abused actual workers, Solidarity 
members denounced the corruption and brutality of the party functionaries 
who answered not to the people of Poland but to remote and isolated bu- 
reaucrats in Moscow. All the desire for democracy and self-determination 
suppressed by one-party rule was being poured into local Solidarity unions, 
sparking a mass exodus of members from the Communist Party. 

Moscow recognized the movement as the most serious threat yet to its East- 
ern empire. Inside the Soviet Union, opposition was still coming largely from 
human rights activists, many of whom were on the political right. But Solidar- 
ity's members couldn't easily be dismissed as stooges of capitalism— they were 


workers with hammers in their hands and coal dust in their pores, the people 
who should, according to Marxist rhetoric, have been the party's base.* Even 
more threatening, Solidarity's vision was everything the party was not: demo- 
cratic where it was authoritarian; dispersed where it was centralized; partici- 
patory where it was bureaucratic. And its 10 million members had the power 
to bring Poland's economy to a standstill. As Walesa taunted, they might lose 
their political battles, "but we will not be compelled to work. Because if peo- 
ple want us to build tanks, we will build streetcars. And trucks will go back- 
ward if we build them that way. We know how to beat the system. We are 
pupils of that system." 

Solidarity's commitment to democracy inspired even party insiders to 
rebel. "Once I was so naive as to think that a few evil men were responsible 
for the errors of the party," Marian Arendt, a member of the Central Com- 
mittee, told a Polish newspaper. "Now I no longer have such illusions. There 
is something wrong in our whole apparatus, in our entire structure." 6 

In September 1981, Solidarity's members were ready to take their move- 
ment to the next stage. Nine hundred Polish workers gathered once again in 
Gdansk for the union's first national congress. There, Solidarity turned into 
a revolutionary movement with aspirations to take over the state, with its 
own alternative economic and political program for Poland. The Solidarity 
plan stated, "We demand a self-governing and democratic reform at every 
management level and a new socioeconomic system combining the plan, 
self-government and the market." The centrepiece was a radical vision for 
the huge state-run companies, which employed millions of Solidarity mem- 
bers, to break away from governmental control and become democratic 
workers' cooperatives. "The socialized enterprise," the program stated, 
"should be the basic organizational unit in the economy. It should be con- 
trolled by the workers council representing the collective and should be 
operatively run by the director, appointed through competition and re- 
called by the council." 7 Walesa opposed this demand, fearing it was such a 
challenge to party control that it would provoke a crackdown. Others ar- 
gued that the movement needed a goal, a positive hope for the future, not 
just an enemy. Walesa lost the debate, and the economic program became 
official Solidarity policy. 

Walesa's fears of a crackdown turned out to be well founded. Solidarity's 

* One of the popular Solidarity slogans in 1980 was "Socialism— YES, Its distortions— NO" 
(which no doubt works better in Polish). 


mounting ambition frightened and infuriated Moscow. Under intense pres- 
sure, Poland's leader, General Wojciech Jaruzelski, declared martial law in 
December 1981. Tanks rolled through the snow to surround factories and 
mines, Solidarity's members were rounded up in the thousands, and its lead- 
ers, including Walesa, were arrested and imprisoned. As Time reported, 
"Soldiers and police used force to clear out resisting workers, leaving at least 
seven dead and hundreds injured when miners in Katowice fought back with 
axes and crowbars." 8 

Solidarity was forced underground, but during the eight years of police-state 
rule, the movement's legend only grew. In 1983, Walesa was awarded the No- 
bel Peace Prize, although his activities were still restricted and he could not 
accept the prize in person. "The Peace Prize laureate's seat is empty," the rep- 
resentative from the Nobel Committee said at the ceremony. "Let us therefore 
try even harder to listen to the silent speech from his empty place." 

The empty space was a fitting metaphor because, by that time, everyone 
seemed to see what they wanted in Solidarity: the Nobel Committee saw a 
man who "espoused no other weapon than the peaceful strike weapon." 9 
The left saw redemption, a version of socialism that was not tainted by the 
crimes of Stalin or Mao. The right saw evidence that Communist states 
would meet even moderate expressions of dissent with brutal force. The hu- 
man rights movement saw prisoners jailed for their beliefs. The Catholic 
Church saw an ally against Communist atheism. And Margaret Thatcher 
and Ronald Reagan saw an opening, a crack in the Soviet armor, even 
though Solidarity was fighting for the very rights that both leaders were doing 
their best to stamp out at home. The longer the ban lasted, the more power- 
ful the Solidarity mythology became. 

By 1988, the terror of the initial crackdown had eased, and Polish workers 
were once again staging huge strikes. This time, with the economy in free 
fall, and the new, moderate regime of Mikhail Gorbachev in power in 
Moscow, the Communists gave in. They legalized Solidarity and agreed to 
hold snap elections. Solidarity split in two: there was now the union and a 
new wing, Citizens' Committee Solidarity, that would participate in the elec- 
tions. The two bodies were inextricably linked; Solidarity leaders were the 
candidates, and because the electoral platform was vague, the only specifics of 
what a Solidarity future might look like were provided by the union's eco- 
nomic program. Walesa himself didn't run, choosing to maintain his role as 
head of the union wing, but he was the face of the campaign, which ran un- 
der the slogan "With us, you're safer." 10 The results were humiliating for the 


Communists and glorious for Solidarity: of the 261 seats in which Solidarity 
ran candidates, it won 260 of them.* Walesa, maneuvering behind the 
scenes, had the post of prime minister filled by Tadeusz Mazowiecki. He had 
little of Walesa's charisma, but as the editor of the Solidarity weekly newspa- 
per, he was considered one of the movement's leading intellectuals. 

The Shock of Power 

As Latin Americans had just learned, authoritarian regimes have a habit of 
embracing democracy at the precise moment when their economic projects 
are about to implode. Poland was no exception. The Communists had been 
mismanaging the economy for decades, making one disastrous, expensive 
mistake after another, and it was at the point of collapse. "To our misfortune, 
we have won!" Walesa famously (and prophetically) declared. When Solidar- 
ity took office, debt was $40 billion, inflation was at 600 percent, there were 
severe food shortages and a thriving black market. Many factories were mak- 
ing products that, with no buyers in sight, were destined to rot in ware- 
houses. 11 For Poles, the situation made for a cruel entry into democracy. 
Freedom had finally come, but few had the time or the inclination to cele- 
brate because their paychecks were worthless. They spent their days lining 
up for flour and butter if there happened to be any in the stores that week. 

All summer following its triumph at the polls, the Solidarity government 
was paralyzed by indecision. The speed of the collapse of the old order and 
the sudden election sweep had been shocks in themselves: in a matter of 
months, Solidarity activists went from hiding from the secret police to being 
responsible for paying the salaries of those same agents. And now they had 
the added shock of discovering that they barely had enough money to make 
the payroll. Rather than building the post-Communist economy they had 
dreamed of, the movement had the far more pressing task of avoiding a com- 
plete meltdown and potential mass starvation. 

Solidarity's leaders knew they wanted to put an end to the state's viselike 
grip on the economy, but they weren't at all clear about what could replace 
it. For the movement's militant rank and file, this was the chance to test their 
economic program: if the state-run factories were converted to workers' 

* The elections, while a breakthrough, were still rigged: from the outset, the Communist 
Party was guaranteed 65 percent of the seats in parliament's lower house, and Solidarity 
was allowed to contest only the remaining ones. Nevertheless, the win was so sweeping that 
Solidarity gained effective control of the government. 


cooperatives, there was a chance they could become economically viable 
again— worker management could be more efficient, especially without the 
added expense of party bureaucrats. Others argued for the same gradual ap- 
proach to transition that Gorbachev was advocating at the time in Moscow- 
slow expansion of the areas in which supply-and-demand monetary rules 
apply (more legal shops and markets), combined with a strong public sector 
modeled on Scandinavian social democracy. 

But as had been the case in Latin America, before anything else could 
happen, Poland needed debt relief and some aid to get out of its immediate 
crisis. In theory, that's the central mandate of the IMF: providing stabilizing 
funds to prevent economic catastrophes. If any government deserved that 
kind of lifeline it was the one headed by Solidarity, which had just pulled off 
the Eastern Bloc's first democratic ouster of a Communist regime in four de- 
cades. Surely, after all the Cold War railing against totalitarianism behind 
the Iron Curtain, Poland's new rulers could have expected a little help. 

No such aid was on offer. Now in the grips of Chicago School economists, 
the IMF and the U.S. Treasury saw Poland's problems through the prism of 
the shock doctrine. An economic meltdown and a heavy debt load, com- 
pounded by the disorientation of rapid regime change, meant that Poland 
was in the perfect weakened position to accept a radical shock therapy pro- 
gram. And the financial stakes were even higher than in Latin America: East- 
ern Europe was untouched by Western capitalism, with no consumer market 
to speak of. All of its most precious assets were still owned by the state — 
prime candidates for privatization. The potential for rapid profits for those 
who got in first was tremendous. 

Confident in the knowledge that the worse things got, the more likely the 
new government would be to accept a total conversion to unfettered capital- 
ism, the IMF let the country fall deeper and deeper into debt and inflation. 
The White House, under George H. W. Bush, congratulated Solidarity on 
its triumph against Communism but made it clear that the U.S. administra- 
tion expected Solidarity to pay the debts accumulated by the regime that had 
banned and jailed its members — and it offered only $119 million in aid, a 
pittance in a country facing economic collapse and in need of fundamental 

It was in this context that Jeffrey Sachs, then thirty-four, started working as 
an adviser to Solidarity. Since his Bolivian exploits, the hype surrounding 
Sachs had reached feverish levels. Marveling at how he could serve as eco- 
nomic shock doctor to half a dozen countries and still hold down his teaching 


job, the Los Angeles Times pronounced Sachs— who still looked like a mem- 
ber of the Harvard debate team— the "Indiana Jones of Economics." 12 

Sachs's work in Poland had begun before Solidarity's election victory, at 
the request of the Communist government. It started with a one-day trip, 
during which he met with the Communist government and with Solidarity. 
It was George Soros, the billionaire financier and currency trader, who had 
enlisted Sachs to play a more hands-on role. Soros and Sachs traveled to 
Warsaw together, and as Sachs recalls, "I told the Solidarity group and the 
Polish government that I would be willing to become more involved to help 
address the deepening economic crisis." 13 Soros agreed to cover the costs for 
Sachs and his colleague David Lipton, a staunch free-market economist 
then working at the IMF, to set up an ongoing Poland mission. When Soli- 
darity swept the elections, Sachs began working closely with the movement. 

Though he was a free agent, not on the payroll of either the IMF or the 
U.S. government, Sachs, in the eyes of many of Solidarity's top officials, pos- 
sessed almost messianic powers. With his high-level contacts in Washington 
and legendary reputation, he seemed to hold the key to unlocking the aid 
and debt relief that was the new government s only chance. Sachs said at the 
time that Solidarity should simply refuse to pay the inherited debts, and he 
expressed confidence that he could mobilize $3 billion in support — a for- 
tune compared with what Bush had offered. 14 He had helped Bolivia land 
loans with the IMF and renegotiated its debts; there seemed no reason to 
doubt him. 

That help, however, came at a price: for Solidarity to get access to 
Sachs's connections and powers of persuasion, the government first needed 
to adopt what became known in the Polish press as "the Sachs Plan" or 
"shock therapy." 

It was an even more radical course than the one imposed on Bolivia: in 
addition to eliminating price controls overnight and slashing subsidies, the 
Sachs Plan advocated selling off the state mines, shipyards and factories to 
the private sector. It was a direct clash with Solidarity's economic program of 
worker ownership, and though the movement's national leaders had stopped 
talking about the controversial ideas in that plan, they remained articles of 
faith for many Solidarity members. Sachs and Lipton wrote the plan for 
Poland's shock therapy transition in one night. It was fifteen pages long and, 
Sachs claimed, was "the first time, I believe, that anyone had written down a 
comprehensive plan for the transformation of a socialist economy to a mar- 
ket economy." 15 


Sachs was convinced that Poland had to take this "leap across the institu- 
tional chasm" right away because, in addition to all its other problems, it was 
on the verge of entering hyperinflation. Once that happened, he said, it 
would be "fundamental breakdown . . . just pure, unmitigated disaster." 16 

He gave several one-on-one seminars explaining the plan to key Solidarity 
officials, some lasting up to four hours, and he also addressed Poland's elected 
officials as a group. Many of Solidarity's leaders didn't like Sachs's ideas— the 
movement had formed in a revolt against drastic price increases imposed by 
the Communists— and now Sachs was telling them to do the same on a far 
more sweeping scale. He argued that they could get away with it precisely 
because "Solidarity had a reservoir of trust of the public, which was ab- 
solutely phenomenal and critical." 17 

Solidarity's leaders hadn't planned to expend that trust on policies that 
would cause extreme pain to their rank and file, but the years spent in the 
underground, in jail and in exile had also alienated them from their base. As 
the Polish editor Przemyslaw Wielgosz explains, the top tier of the move- 
ment "became effectively cut off . . . their support came not from the facto- 
ries and industrial plants, but the church." 18 The leaders were also desperate 
for a quick fix, even if it was painful, and that was what Sachs was offering. 
"Will this work? That's what I want to know. Will this work?" demanded 
Adam Michnik, one of Solidarity's most celebrated intellectuals. Sachs did 
not waver: "This is good. This will work."* 19 

Sachs often held up Bolivia as the model that Poland should emulate, so 
often that the Poles grew tired of hearing about the place. "I would love to 
see Bolivia," one Solidarity leader told a reporter at the time. "I'm sure it's 
very lovely, very exotic. I just don't want to see Bolivia here." Lech Walesa 
developed a particularly acute antipathy to Bolivia, as he admitted to Gon- 
zalo Sanchez de Lozada (Goni) when the two men met years later at a sum- 
mit, when they were both presidents. "He came up to me," Goni recalled, 
"and said, Tve always wanted to meet a Bolivian, especially a Bolivian presi- 
dent, because they're always making us take this very bitter medicine, saying 
you have to do it because this is what the Bolivians did. Now I know you, 
you're not that bad a guy, but I sure used to hate you.' " 20 

In Sachs's talk of Bolivia, he failed to mention that in order to push 
through the shock therapy program, the government had imposed a state of 

* Michnik Later observed bitterly that "the worst thing about Communism is what comes 


emergency and, on two separate occasions, kidnapped and interned the 
union leadership — much as the Communist Party secret police had 
snatched and imprisoned Solidarity's leaders under a state of emergency not 
so long before. 

What was most persuasive, many now recall, was Sachs's promise that if 
they followed his harsh advice, Poland would cease being exceptional and 
become "normal" — as in "a normal European country." If Sachs was right, 
and they really could fast-forward to becoming a country like France or Ger- 
many simply by hacking off the structures of the old state, wasn't the pain 
worth it? Why take an incremental route to change that could well fail — or 
pioneer a new third way— when this insta-Europe version was right there, 
calling out? Sachs predicted that shock therapy would cause "momentary 
dislocations" as prices spiked. "But then they'll stabilize— people will know 
where they stand." 21 

He formed an alliance with Poland's newly appointed finance minister, 
Leszek Balcerowicz, an economist at the Main School of Planning and Sta- 
tistics in Warsaw. Little was known of Balcerowicz's political leanings when 
he was appointed (all economists were officially socialist), but it would soon 
become clear that he saw himself as an honorary Chicago Boy, having pored 
over an illegal Polish edition of Friedman's Free to Choose. It helped "to in- 
spire me, and many others, to dream of a future of freedom during the dark- 
est years of communist rule," Balcerowicz later explained. 22 

Friedman's fundamentalist version of capitalism was a long way from 
what Walesa had been promising the country that summer. He was still in- 
sisting that Poland was going to find that more generous third way, which he 
described in an interview with Barbara Walters as "a mixture. ... It won't be 
capitalism. It will be a system that is better than capitalism, that will reject 
everything that is evil in capitalism." 23 

Many did argue that the sudden fix that Sachs and Balcerowicz were sell- 
ing was a myth, that, rather than jolting Poland into health and normalcy, 
shock therapy would create an even bigger mess of poverty and deindustrial- 
ization than before. "This is a poor, weak country. We simply cannot take 
the shock," a leading doctor and health care advocate told the New Yorker 
journalist Lawrence Weschler. 24 

For three months after their historic victory at the polls and their abrupt 
transition from outlaws to lawmakers, the Solidarity inner circle debated, 
paced, yelled and chain-smoked, unable to decide what to do. Every day, the 
country fell deeper into economic crisis. 


A Very Hesitant Embrace 

On September 12, 1989, the Polish prime minister, Tadeusz Mazowiecki, 
rose before the first elected parliament. The Solidarity caucus had at last de- 
cided what it was going to do about the economy, but only a handful of peo- 
ple knew the final decision — was it the Sachs Plan, the Gorbachev gradualist 
route or Solidarity's platform of workers' cooperatives? 

Mazowiecki was on the verge of announcing the verdict, but in the mid- 
dle of his momentous speech, before he could confront the country's most 
burning question, something went terribly wrong. He started to sway, 
clasped the lectern and, according to one witness, "grew pale, gasped for 
breath and was heard to mutter under his breath, 'I'm not feeling too 
well.' " 25 His aides whisked him out of the chamber, leaving the 41 5 deputies 
to trade rumors. Was it a heart attack? Had he been poisoned? By the Com- 
munists? By the Americans? 

One floor below, a team of doctors examined Mazowiecki and adminis- 
tered an electrocardiogram. It wasn't a heart attack or poison. The prime 
minister was simply suffering from "acute fatigue," from too little sleep and 
too much stress. After almost an hour of tense uncertainty, he reentered the 
parliamentary chamber, where he was greeted with thunderous applause. 
"Excuse me," said the bookish Mazowiecki. "The state of my health is the 
same as the state of the Polish economy." 26 

At long last, the verdict: the Polish economy would be treated for its own 
acute fatigue with shock therapy, a particularly radical course of it that 
would include "privatization of state industry, the creation of a stock ex- 
change and capital markets, a convertible currency, and a shift from heavy 
industry to consumer goods production" as well as "budget cuts"— as fast as 
possible and all at once. 27 

If the dream of Solidarity began with Walesa's energetic vault over the steel 
fence in Gdansk, then Mazowiecki's exhaustedly succumbing to shock ther- 
apy represented the end of that dream. Finally, the decision came down to 
money. Solidarity's members did not decide that their vision for a coopera- 
tively run economy was wrongheaded, but their leaders became convinced 
that all that mattered was winning relief from the Communist debts and im- 
mediately stabilizing the currency. As Henryk Wujec, one of Poland's lead- 
ing advocates of cooperatives, put it at the time, "If we had enough time, we 
might even be able to pull it off. But we don't have time." 28 Sachs, meanwhile, 


could deliver the money. He helped Poland negotiate an agreement with the 
IMF and secured some debt relief and $1 billion to stabilize the currency— 
but all of it, particularly the IMF funds, was strictly conditional on Solidar- 
ity's submitting to shock therapy. 

Poland became a textbook example of Friedman's crisis theory: the disori- 
entation of rapid political change combined with the collective fear gener- 
ated by an economic meltdown to make the promise of a quick and magical 
cure — however illusory— too seductive to turn down. Halina Bortnowska, a 
human rights activist, described the velocity of change in this period as "the 
difference between dog years and human years, the way we're living these 
days . . . you start witnessing these semi-psychotic reactions. You can no 
longer expect people to act in their own best interests when they're so disori- 
ented they don't know— or no longer care— what those interests are." 29 

Balcerowicz, the finance minister, has since admitted that capitalizing on 
the emergency environment was a deliberate strategy— a way, like all shock 
tactics, to clear away the opposition. He explained that he was able to push 
through policies that were antithetical to the Solidarity vision in both content 
and form because Poland was in what he dubbed a period of "extraordinary 
politics." He described that condition as a short-lived window in which the 
rules of "normal politics" (consultation, discussion, debate) do not apply- 
in other words, a democracy-free pocket within a democracy. 30 

"Extraordinary politics," he said, "by definition is a period of very clear dis- 
continuity in a country's history. It could be a period of very deep economic 
crisis, of a breakdown of the previous institutional system, or of a liberation 
from external domination (or end of war). In Poland, all three phenomena 
converged in 1989," 31 Because of those extraordinary circumstances, he was 
able to shunt aside due process and force "a radical acceleration of the leg- 
islative process" to pass the shock therapy package. 32 

In the early nineties, Balcerowicz's theory about periods of "extraordinary 
politics" attracted considerable interest among Washington economists. And 
no wonder: only two months after Poland announced that it would accept 
shock therapy, something happened that would change the course of history 
and invest Poland's experiment with global significance. In November 1989, 
the Berlin Wall was joyously dismantled, the city was turned into a festival of 
possibility and the MTV flag was planted in the rubble, as if East Berlin were 
the face of the moon. Suddenly it seemed that the whole world was living 
the same kind of fast-forward existence as the Poles: the Soviet Union was on 


the verge of breaking apart, apartheid in South Africa seemed on its last legs, 
authoritarian regimes continued to crumble in Latin America, Eastern Eu- 
rope and Asia, and long wars were coming to an end from Namibia to 
Lebanon. Everywhere, old regimes were collapsing, and the new ones rising 
in their place had yet to take shape. 

Within a few years it seemed as if half the world was in a period of "ex- 
traordinary politics," or "in transition," as liberated countries came to be 
called in the nineties — suspended in an existential in-betweenness of past 
and future. According to Thomas Carothers, a leader in the U.S. govern- 
ment's so-called democracy-promotion apparatus, "in the first half of the 
1990s ... the set of 'transitional countries' swelled dramatically, and nearly 
100 countries (approximately 20 in Latin America, 25 in Eastern Europe 
and the former Soviet Union, 30 in sub-Saharan Africa, 10 in Asia, and 5 in 
the Middle East) were in some kind of dramatic transition from one model 
to another." 33 

Many were claiming that all of this flux, and the fall of real and meta- 
phorical walls, would lead to an end of ideological orthodoxy. Freed from 
the polarizing effects of dueling superpowers, countries would finally be able 
to choose the best of both worlds — some hybrid of political freedom and 
economic security. As Gorbachev put it, "Many decades of being mesmer- 
ized by dogma, by a rule-book approach, have had their effect. Today we 
want to introduce a genuinely creative spirit." 34 

In Chicago School circles, such talk of mix-and-match ideologies was 
met with open contempt. Poland had clearly shown that this kind of chaotic 
transition opened up a window for decisive men, acting swiftly, to push 
through rapid change. Now was the moment to convert former Communist 
countries to pure Friedmanism, not some mongrel Keynesian compromise. 
The trick, as Friedman had said, was for Chicago School believers to be 
ready with their solutions when everyone else was still asking questions and 
regaining their bearings. 

A sort of revival meeting for those who embraced this worldview was held 
in that eventful winter of 1989; the location, fittingly, was the University of 
Chicago. The occasion was a speech by Francis Fukuyama titled "Are We 
Approaching the End of History?"* For Fukuyama, then a senior policy 
maker at the U.S. State Department, the strategy for advocates of unfettered 

* The lecture formed the foundation for Fukuyama's book The End of History and the Last Man, 
published three years later. 


capitalism was clear: don't debate with the third-way crowd; instead, pre- 
emptively declare victory. Fukuyama was convinced that there should be no 
abandonment of extremes, no best of both worlds, no splitting the difference. 
The collapse of Communism, he told his audience, was leading "not to an 
'end of ideology' or a convergence between capitalism and socialism . . . but 
to an unabashed victory of economic and political liberalism." It was not ide- 
ology that had ended but "history as such." 35 

The talk was sponsored by John M. Olin, longtime funder of Milton 
Friedman's ideological crusade and bankroller of the boom in right-wing 
think tanks. 36 The synergy was fitting since Fukuyama was essentially restat- 
ing Friedman's claim that free markets and free people are part of an insep- 
arable project. Fukuyama took that thesis into bold new terrain, arguing that 
deregulated markets in the economic sphere, combined with liberal democ- 
racy in the political sphere, represented "the end point of mankind's ideo- 
logical evolution and . . . final form of human government." 37 Democracy 
and radical capitalism were fused not only with each other but also with 
modernity, progress and reform. Those who objected to the merger were not 
just wrong but "still in history," as Fukuyama put it, the equivalent of being 
left behind after the Rapture, since everyone else had already transcended to 
a celestial "posthistorical" plane. 38 

The argument was a magnificent example of the democracy avoidance 
honed by the Chicago School. Much as the IMF had sneaked privatization 
and "free trade" into Latin America and Africa under cover of emergency 
"stabilization" programs, Fukuyama was now trying to smuggle this same 
highly contested agenda into the pro-democracy wave rising up from War- 
saw to Manila. It was true, as Fukuyama noted, that there was an emerging 
and irrepressible consensus that all people have the right to govern them- 
selves democratically, but only in the State Department's most vivid fan- 
tasies was that desire for democracy accompanied by citizens' clamoring for 
an economic system that would strip away job protections and cause mass 

If there was a genuine consensus about anything, it was that for people es- 
caping both left-wing and right-wing dictatorships, democracy meant finally 
having a say in all major decisions rather than having somebody else's ideol- 
ogy imposed unilaterally and with force. In other words, the universal princi- 
ple that Fukuyama identified as "the sovereignty of the people" included the 
sovereignty of the people to choose how the wealth of their countries would 
be distributed, from the fate of state-owned companies to the level of funding 


for schools and hospitals. Around the world, citizens were ready to exercise 
their hard-won democratic powers to become the authors of their national 
destinies, at last. 

In 1989, history was taking an exhilarating turn, entering a period of gen- 
uine openness and possibility. So it was no coincidence that Fukuyama, 
from his perch at the State Department, chose precisely that moment to at- 
tempt to slam the history book shut. Nor was it a coincidence that the World 
Bank and the IMF chose that same volatile year to unveil the Washington 
Consensus — a clear effort to halt all discussion and debate about any eco- 
nomic ideas outside the free-market lockbox. These were democracy- 
containment strategies, designed to undercut the kind of unscripted 
self-determination that was, and always had been, the greatest single threat 
to the Chicago School crusade. 

The Shock of Tiananmen Square 

One place where Fukuyama's bold pronouncement came in for early dis- 
crediting was China. Fukuyama's speech took place in February 1989; two 
months later, a pro-democracy movement exploded in Beijing, with mass 
protests and sit-ins in Tiananmen Square. Fukuyama had claimed that 
democratic and "free market reforms" were a twin process, impossible to pry 
apart. Yet in China, the government had done precisely that: it was pushing 
hard to deregulate wages and prices and expand the reach of the market- 
but it was fiercely determined to resist calls for elections and civil liberties. 
The demonstrators, on the other hand, demanded democracy, but many op- 
posed the government's moves toward unregulated capitalism, a fact largely 
left out of the coverage of the movement in the Western press. In China, 
democracy and Chicago School economics were not proceeding hand in 
hand; they were on opposite sides of the barricades surrounding Tiananmen 

In the early 1980s, the Chinese government, then led by Deng Xiaoping, 
was obsessed with avoiding a repeat of what had just happened in Poland, 
where workers had been allowed to form an independent movement that 
challenged the party's monopoly hold on power. It was not that China's 
leaders were committed to protecting the state-owned factories and farm 
communes that formed the foundation of the Communist state. In fact, 
Deng was enthusiastically committed to converting to a corporate-based 


economy— so committed that, in 1980, his government invited Milton 
Friedman to come to China and tutor hundreds of top-level civil servants, 
professors and party economists in the fundamentals of free-market theory. 
"All were invited guests, who had to show a ticket of invitation to attend " 
Friedman recalled of his audiences in Beijing and Shanghai. His central 
message was "how much better ordinary people lived in capitalist than in 
communist countries." 39 The example he held up was Hong Kong, a zone of 
pure capitalism that Friedman had long admired for its "dynamic, innova- 
tive character that has been produced by personal liberty, free trade, low 
taxes, and minimal government intervention." He claimed that Hong Kong, 
despite having no democracy, was freer than the United States, since its gov- 
ernment participated less in the economy. 40 

Friedman's definition of freedom, in which political freedoms were inci- 
dental, even unnecessary, compared with the freedom of unrestricted com- 
merce, conformed nicely with the vision taking shape in the Chinese 
Politburo. The party wanted to open the economy to private ownership and 
consumerism while maintaining its own grip on power— a plan that ensured 
that once the assets of the state were auctioned off, party officials and their 
relatives would snap up the best deals and be first in line for the biggest prof- 
its. According to this version of "transition," the same people who controlled 
the state under Communism would control it under capitalism, while en- 
joying a substantial upgrade in lifestyle. The model the Chinese government 
intended to emulate was not the United States but something much closer to 
Chile under Pinochet: free markets combined with authoritarian political 
control, enforced by iron-fisted repression. 

From the start, Deng clearly understood that repression would be crucial. 
Under Mao, the Chinese state had exerted brutal control over the people, 
dispensing with opponents and sending dissidents for reeducation. But 
Mao's repression took place in the name of the workers and against the bour- 
geoisie; now the party was going to launch its own counterrevolution and ask 
workers to give up many of their benefits and security so that a minority 
could collect huge profits. It was not going to be an easy task. So, in 1983, as 
Deng opened up the country to foreign investment and reduced protections 
for workers, he also ordered the creation of the 400,000-strong People's Armed 
Police, a new, roving riot squad charged with quashing all signs of "eco- 
nomic crimes" (i.e., strikes and protests). According to the China historian 
Maurice Meisner, "The People's Armed Police kept American helicopters 


and electric cattle prods in its arsenal." And "several units were sent to 
Poland for anti-riot training"— where they studied the tactics that had been 
used against Solidarity during Poland's period of martial law. 41 

Many of Deng's reforms were successful and popular— farmers had more 
control over their lives, and commerce returned to the cities. But in the late 
eighties, Deng began introducing measures that were distinctly unpopular, 
particularly among workers in the cities— price controls were lifted, sending 
prices soaring; job security was eliminated, creating waves of unemploy- 
ment; and deep inequalities were opening up between the winners and los- 
ers in the new China. By 1988, the party was confronting a powerful 
backlash and was forced to reverse some of its price deregulation. Outrage 
was also mounting in the face of the party's defiant corruption and nepo- 
tism. Many Chinese citizens wanted more freedom in the market, but "re- 
form" increasingly looked like code for party officials turning into business 
tycoons, as many illegally took posession of the assets they had previously 
managed as bureaucrats. 

With the free-market experiment in peril, Milton Friedman was once 
again invited to pay a visit to China — much as the Chicago Boys and the pi- 
ranhas had enlisted his help in 1975, when their program had sparked an in- 
ternal revolt in Chile. 42 A high-profile visit from the world-famous guru of 
capitalism was just the boost China's "reformers" needed. 

When Friedman and his wife, Rose, arrived in Shanghai in September 
1988, they were dazzled by how quickly mainland China was beginning to 
look and feel like Hong Kong. Despite the rage simmering at the grass roots, 
everything they saw served to confirm "our faith in the power of free mar- 
kets." Friedman described this moment as "the most hopeful period of the 
Chinese experiment." 

In the presence of official state media, Friedman met for two hours with 
Zhao Ziyang, general secretary of the Communist Party, as well as with Jiang 
Zemin, then party secretary of the Shanghai Committee and the future Chi- 
nese president. Friedman's message to Jiang echoed the advice he had given 
to Pinochet when the Chilean project was on the skids: don't bow to the 
pressure and don't blink. "I emphasized the importance of privatization and 
free markets, and of liberalizing at one fell stroke," Friedman recalled. In a 
memo to the general secretary of the Communist Party, Friedman stressed 
that more, not less, shock therapy was needed. "China's initial steps of re- 
form have been dramatically successful. China can make further dramatic 
progress by placing still further reliance on free private markets."^ 


Shortly after his return to the U.S., Friedman, remembering the heat he 
had taken for advising Pinochet, wrote "out of sheer devilry" a letter to the 
editor of a student newspaper, denouncing his critics for their double stan- 
dards. He explained that he had just spent twelve days in China, where "I 
was mostly the guest of governmental entities," and had met with Commu- 
nist Party officials at the highest level. Yet these meetings had provoked no 
human rights outcry on American university campuses, Friedman pointed 
out. "Incidentally, I gave precisely the same advice to both Chile and 
China." He concluded by asking sarcastically, "Should I prepare myself for 
an avalanche of protests for having been willing to give advice to so evil a 
government?" 44 

A few months later, that devilish letter took on sinister overtones, as the 
Chinese government began to emulate many of Pinochets most infamous 

Friedman's trip did not have the desired results. The pictures in the official 
papers of the professor offering his blessing to party bureaucrats did not suc- 
ceed in bringing the public onside. In subsequent months, protests grew 
more determined and radical. The most visible symbols of the opposition 
were the demonstrations by student strikers in Tiananmen Square. These 
historic protests were almost universally portrayed in the international media 
as a clash between modern, idealistic students who wanted Western-style 
democratic freedoms and old-guard authoritarians who wanted to protect 
the Communist state. Recently, another analysis of the meaning of Tianan- 
men has emerged, one that challenges the mainstream version while putting 
Friedmanism at the heart of the story. This alternative narrative is being ad- 
vanced by, among others, Wang Hui, one of the organizers of the 1989 
protests, and now a leading Chinese intellectual of what is known as China's 
"New Left." In his 2003 book, China's New Order, Wang explains that the 
protesters spanned a huge range of Chinese society— not just elite university 
students but also factory workers, small entrepreneurs and teachers. What ig- 
nited the protests, he recalls, was popular discontent in the face of Dengs 
"revolutionary" economic changes, which were lowering wages, raising 
prices and causing "a crisis of layoffs and unemployment." 45 According to 
Wang, "These changes were the catalyst for the 1989 social mobilization." 46 
The demonstrations were not against economic reform per se; they were 
against the specific Friedmanite nature of the reforms— their speed, ruth- 
lessness and the fact that the process was highly antidemocratic. Wang says 


that the protesters' call for elections and free speech were intimately con- 
nected to this economic dissent. What drove the demand for democracy was 
the fact that the party was pushing through changes that were revolutionary 
in scope, entirely without popular consent. There was, he writes, "a general 
request for democratic means to supervise the fairness of the reform process 
and the reorganization of social benefits." 47 

These demands forced the Politburo to make a definite choice. The 
choice was not, as was so often claimed, between democracy and Commu- 
nism, or "reform" versus the "old guard." It was a more complex calculation: 
Should the party bulldoze ahead with its free-market agenda, which it could 
do only by rolling over the bodies of the protesters? Or should it bow to the 
protesters' demands for democracy, cede its monopoly on power and risk a 
major setback to the economic project? 

Some of the free-market reformers within the party, most notably General 
Secretary Zhao Ziyang, appeared willing to gamble on democracy, con- 
vinced that economic and political reform could still be compatible. More 
powerful elements in the party were not willing to take the risk. The verdict 
came down: the state would protect its economic "reform" program by 
crushing the demonstrators. 

That was the clear message when, on May 20, 1989, the government of the 
People's Republic of China declared martial law. On June 3, the tanks of 
the People's Liberation Army rolled into the protests, shooting indiscrimi- 
nately into the crowds. Soldiers stormed onto buses where student demon- 
strators were taking cover and beat them with sticks; more troops broke 
through the barricades protecting Tiananmen Square, where students had 
erected a Goddess of Democracy statue, and rounded up the organizers. 
Similar crackdowns took place simultaneously across the country. 

There will never be reliable estimates for how many people were killed 
and injured in those days. The party admits to hundreds, and eyewitness re- 
ports at the time put the number of dead at between two thousand and seven 
thousand and the number of injured as high as thirty thousand. The protests 
were followed by a national witch hunt against all regime critics and oppo- 
nents. Some forty thousand were arrested, thousands were jailed and 
many— possibly hundreds— were executed. As in Latin America, the gov- 
ernment reserved its harshest repression for the factory workers, who repre- 
sented the most direct threat to deregulated capitalism. "Most of those 
arrested, and virtually all who were executed, were workers. With the obvi- 
ous aim of terrorizing the population, it became a well-publicized policy to 


systematically subject arrested individuals to beatings and torture," writes 
Maurice Meisner. 48 

For the most part, the massacre was covered in the Western press as an- 
other example of Communist brutality: just as Mao had wiped out his oppo- 
nents during the Cultural Revolution, now Deng, "the Butcher of Beijing ," 
crushed his critics under the watchful eye of Mao's giant portrait. A Wall 
Street journal headline claimed that "China's Harsh Actions Threaten to Set 
Back [the] 10-Year Reform Drive" — as if Deng was an enemy of those re- 
forms and not their most committed defender, determined to take them into 
bold new territory. 49 

Five days after the bloody crackdown, Deng addressed the nation and 
made it perfectly clear that it wasn't Communism he was protecting with his 
crackdown, but capitalism. After dismissing the protesters as "a large quan- 
tity of the dregs of society," China's president reaffirmed the party's commit- 
ment to economic shock therapy. "In a word, this was a test, and we passed," 
Deng said, adding, "Perhaps this bad thing will enable us to go ahead with 
reform and the open-door policy at a more steady, better, even a faster 
pace. . . . We haven't been wrong. There's nothing wrong with the four car- 
dinal principles [of economic reform]. If there is anything amiss, it's that 
these principles haven't been thoroughly implemented."* 50 

Orville Schell, a China scholar and journalist, summarized Deng Xiao- 
ping's choice: "After the massacre of 1989, he in effect said we will not stop 
economic reform; we will in effect halt political reform." 51 

For Deng and the rest of the Politburo, the free-market possibilities were 
now limitless. Just as Pinochet's terror had cleared the streets for revolution- 
ary change, so Tiananmen paved the way for a radical transformation free 
from fear of rebellion. If life grew harder for peasants and workers, they 
would either have to accept it quietly or face the wrath of the army and the 
secret police. And so, with the public in a state of raw terror, Deng rammed 
through his most sweeping reforms yet. 

Before Tiananmen, he had been forced to ease off some of the more 
painful measures; three months after the massacre, he brought them back, 
and he implemented several of Friedman's other recommendations, includ- 
ing price deregulation. For Wang Hui, there is an obvious reason why "market 

* Deng had some notable defenders. After the massacre, Henry Kissinger wrote an op-ed 
arguing that the party had no choice. "No government in the world would have tolerated 
having the main square of its capital occupied for eight weeks by tens of thousands of 
demonstrators. ... A crackdown was therefore inevitable." 


reforms that had failed to be implemented in the late 1980s just happened to 
have been completed in the post- 1989 environment"; the reason, he writes, 
"is that the violence of 1989 served to check the social upheaval brought 
about by this process, and the new pricing system finally took shape." 52 The 
shock of the massacre, in other words, made shock therapy possible. 

In the three years immediately following the bloodbath, China was 
cracked open to foreign investment, with special export zones constructed 
throughout the country. As he announced these new initiatives, Deng re- 
minded the country that "if necessary, every possible means will be adopted 
to eliminate any turmoil in the future as soon as it has appeared. Martial law, 
or even more severe methods, may be introduced."* 53 

It was this wave of reforms that turned China into the sweatshop of the 
world, the preferred location for contract factories for virtually every multi- 
national on the planet. No country offered more lucrative conditions than 
China: low taxes and tariffs, corruptible officials and, most of all, a plentiful 
low-wage workforce that, for many years, would be unwilling to risk de- 
manding decent salaries or the most basic workplace protections for fear of 
the most violent reprisals. 

For foreign investors and the party, it has been a win-win arrangement. 
According to a 2006 study, 90 percent of China's billionaires (calculated in 
Chinese yuan) are the children of Communist Party officials. Roughly 
twenty-nine hundred of these party scions— known as "the princelings" — 
control $260 billion. 54 It is a mirror of the corporatist state first pioneered in 
Chile under Pinochet: a revolving door between corporate and political 
elites who combine their power to eliminate workers as an organized politi- 
cal force. Today, this collaborative arrangement can be seen in the way that 
foreign multinational media and technology companies help the Chinese 
state to spy on its citizens, and to make sure that when students do Web 
searches on phrases like "Tiananmen Square Massacre," or even "democ- 
racy," no documents turn up. "The creation of today's market society was not 
the result of a sequence of spontaneous events," writes Wang Hui, "but 
rather of state interference and violence." 55 

One of the truths revealed by Tiananmen was the stark similarity between 
the tactics of authoritarian Communism and Chicago School capitalism— a 

* As the New York University anthropologist David Harvey notes, it was only after Tiananmen, 
when Deng went on his famous "southern tour" of China, "that the full force of the central 
government was put behind the opening to foreign trade and foreign direct investment." 


shared willingness to disappear opponents, to blank the slate of all resistance 
and begin anew. 

Despite the fact that the massacre happened just months after he had en- 
couraged Chinese officials to push forward with painful and unpopular free- 
market policies, Friedman never did face "an avalanche of protests for 
having been willing to give advice to so evil a government." And as usual, he 
saw no connection between the advice he had given and the violence re- 
quired to enforce it. While condemning China's use of repression, Fried- 
man continued to hold it up as an example of "the efficacy of free-market 
arrangements in promoting both prosperity and freedom." 56 

In a strange coincidence, the Tiananmen Square massacre took place on 
the same day as Solidarity's historic election sweep in Poland— June 4, 1989. 
They were, in a way, two very different studies in the shock doctrine. Both 
countries had needed to exploit shock and fear to push through a free-market 
transformation. In China, where the state used the gloves-off methods of ter- 
ror, torture and assassination, the result was, from a market perspective, an 
unqualified success. In Poland, where only the shock of economic crisis and 
rapid change were harnessed— and there was no overt violence— the effects 
of the shock eventually wore off, and the results were far more ambiguous. 

In Poland, shock therapy may have been imposed after elections, but it 
made a mockery of the democratic process since it directly conflicted with 
the wishes of the overwhelming majority of voters who had cast their ballots 
for Solidarity. As late as 1992, 60 percent of Poles still opposed privatization 
for heavy industry. Defending his unpopular actions, Sachs claimed he had 
no choice, likening his role to that of a surgeon in an emergency room. 
"When a guy comes into the emergency room and his heart's stopped, you 
just rip open the sternum and you don't worry about the scars that you leave," 
he said. "The idea is to get the guy's heart beating again. And you make a 
bloody mess. But you don't have any choice." 57 

But once Poles recovered from the initial surgery, they had questions about 
both the doctor and the treatment. Shock therapy in Poland did not cause 
"momentary dislocations," as Sachs had predicted. It caused a full-blown de- 
pression: a 30 percent reduction in industrial production in the two years af- 
ter the first round of reforms. With government cutbacks and cheap imports 
flooding in, unemployment skyrocketed, and in 1993 it reached 25 percent in 
some areas— a wrenching change in a country that, under Communism, for 
all its many abuses and hardships, had no open joblessness. Even when the 


economy began growing again, high unemployment remained chronic. Ac- 
cording to the World Bank's most recent figures, Poland has an unemploy- 
ment rate of 20 percent— the highest in the European Union. For those 
under twenty-four, the situation is far worse: 40 percent of young workers 
were unemployed in 2006, twice the EU average. Most dramatic are the 
number of people in poverty: in 1989, 15 percent of Poland's population was 
living below the poverty line; in 2003, 59 percent of Poles had fallen below 
the line. 58 Shock therapy, which eroded job protection and made daily life far 
more expensive, was not the route to Poland's becoming one of Europe's 
"normal" countries (with their strong labor laws and generous social benefits) 
but to the same gaping disparities that have accompanied the counterrevolu- 
tion everywhere it has triumphed, from Chile to China. 

The fact that it was Solidarity, the party built by Poland's blue-collar work- 
ers, that oversaw the creation of this permanent underclass represented a bit- 
ter betrayal, one that bred a deep cynicism and anger in the country that has 
never fully lifted. Solidarity's leaders often play down the party's socialist 
roots, with Walesa now claiming that as far back as 1980 he knew they would 
"have to build capitalism," Karol Modzelewski, a Solidarity militant and in- 
tellectual who spent eight and a half years in Communist jails, retorts an- 
grily, "I wouldn't have spent a week nor a month, let alone eight and a half 
years in jail for capitalism!" 59 

For the first year and a half of Solidarity rule, workers believed their heroes 
when they were assured that the pain was temporary, a necessary stop on the 
way to bringing Poland into modern Europe. Even in the face of soaring un- 
employment, they staged only a smattering of strikes and waited patiently for 
the therapeutic part of their shock therapy to take effect. When the promised 
recovery didn't arrive, at least not in the form of jobs, Solidarity's members 
were simply confused: How could their own movement have delivered a 
standard of living worse than that under Communism? "[Solidarity] de- 
fended me in 1980 when I set up a union committee," one forty-one-year-old 
construction worker said. "But when I went to them for help this time, they 
told me that I have to suffer for the sake of reform." 60 

About eighteen months into Poland's period of "extraordinary politics," 
Solidarity's base had had enough and demanded an end to the experiment. 
The extreme dissatisfaction was reflected in a marked increase in the number 
of strikes: in 1990, when workers were still giving Solidarity a free pass, there 
were only 250 strikes; by 1992 there were more than 6,000 such protests. 61 
Faced with this pressure from below, the government was forced to slow down 


its more ambitious privatization plans. By the end of 1993— a year that saw al- 
most 7,500 strikes — 62 percent of Poland's total industry was still public. 62 

The fact that Polish workers managed to stop the wholesale privatization 
of their country means that as painful as the reforms were, they could have 
been far worse. The wave of strikes unquestionably saved hundreds of thou- 
sands of jobs that would otherwise have been lost if these supposedly ineffi- 
cient firms had been allowed to close or be radically downsized and sold off. 
Interestingly, Poland's economy began growing quickly in this same period, 
proving, according to the prominent Polish economist and former Solidarity 
member Tadeusz Kowalik, that those who were ready to write off the state 
firms as inefficient and archaic were "obviously wrong." 

Besides going on strike, Polish workers found another way to express their 
anger with their onetime allies in Solidarity: they used the democracy they 
had fought for to punish the party decisively at the polls, including their once- 
beloved leader Lech Walesa. The most dramatic trouncing came on Sep- 
tember 19, 1993, when a coalition of left parties, including the former ruling 
Communists (rebranded Democratic Left Alliance), won 66 percent of the 
seats in parliament. Solidarity had, by this time, splintered into warring fac- 
tions. The trade union faction won less than 5 percent, losing official party 
status in the parliament, and a new party led by Mazowiecki, the prime min- 
ister, won just 10.6 percent— a resounding rejection of shock therapy. 

Yet somehow, in the years to come, as dozens of countries struggled with 
how to reform their economies, the inconvenient details — the strikes, the 
election defeats, the policy reversals — would be lost. Instead, Poland would 
be held up as a model, proof that radical free-market makeovers can take 
place democratically and peacefully. 

Like so many stories about countries in transition, this one was mostly a 
myth. But it was better than the truth: in Poland, democracy was used as a 
weapon against "free markets" on the streets and at the polls. Meanwhile in 
China, where the drive for free-wheeling capitalism rolled over democracy in 
Tiananmen Square, shock and terror unleashed one of the most lucrative and 
sustained investor booms in modern history. Another miracle born of a mas- 




Reconciliation means that those who have been on the underside 
of history must see that there is a qualitative difference between 
repression and freedom. And for them, freedom translates into 
having a supply of clean water, having electricity on tap; being 
able to live in a decent home and have a good job; to be able to 
send your children to school and to have accessible health care. I 
mean, what's the point of having made this transition if the quality 
of life of these people is not enhanced and improved? If not, the 
vote is useless. 

—Archbishop Desmond Tutu, chair of South Africa's Truth and Rec- 
onciliation Commission, 2001 1 

Before transferring power, the Nationalist Party wants to emas- 
culate it. It is trying to negotiate a kind of swap where it will give 
up the right to run the country its way in exchange for the right to 
stop blacks from running it their own way. 

— Allister Sparks, South African journalist 2 

In January 1990, Nelson Mandela, age seventy-one, sat down in his prison 
compound to write a note to his supporters outside. It was meant to settle a 
debate over whether twenty-seven years behind bars, most of it spent on 
Robben Island off the coast of Cape Town, had weakened the leader's com- 
mitment to the economic transformation of South Africa's apartheid state. 
The note was only two sentences long, and it decisively put the matter to 


rest: "The nationalisation of the mines, banks and monopoly industries is the 
policy of the ANC, and the change or modification of our views in this re- 
gard is inconceivable. Black economic empowerment is a goal we fully sup- 
port and encourage, but in our situation state control of certain sectors of the 
economy is unavoidable." 3 

History, it turned out, was not over just yet, as Fukuyama had claimed. In 
South Africa, the largest economy on the African continent, it seemed that 
some people still believed that freedom included the right to reclaim and re- 
distribute their oppressors' ill-gotten gains. 

That belief had formed the basis of the policy of the African National 
Congress for thirty-five years, ever since it was spelled out in its statement of 
core principles, the Freedom Charter. The story of the charter's drafting is 
the stuff of folklore in South Africa, and for good reason. The process began 
in 1955, when the party dispatched fifty thousand volunteers into the town- 
ships and countryside. The task of the volunteers was to collect "freedom de- 
mands" from the people— their vision of a postapartheid world in which all 
South Africans had equal rights. The demands were handwritten on scraps 
of paper: "Land to be given to all landless people," "Living wages and shorter 
hours of work," "Free and compulsory education, irrespective of color, race 
or nationality," "The right to reside and move about freely" and many more. 4 
When the demands came back, leaders of the African National Congress 
synthesized them into a final document, which was officially adopted on 
June 26, 1955, at the Congress of the People, held in Kliptown, a "buffer 
zone" township built to protect the white residents of Johannesburg from the 
teeming masses of Soweto. Roughly three thousand delegates— black, In- 
dian, "colored" and a few white— sat together in an empty field to vote on 
the contents of the document. According to Nelson Mandela's account of 
the historic Kliptown gathering, "the charter was read aloud, section by sec- 
tion, to the people in English, Sesotho and Xhosa. After each section, the 
crowd shouted its approval with cries of 'Afrikal' and 'Mayibuye!' " 5 The first 
defiant demand of the Freedom Charter reads, "The People Shall Govern!" 

In the mid-fifties, that dream was decades away from fulfillment. On the 
Congress's second day, the gathering was violently broken up by police, who 
claimed the delegates were plotting treason. 

For three decades, South Africa's government, dominated by white 
Afrikaners and British, banned the ANC and the other political parties that 
were intent on ending apartheid. Throughout this period of intense repres- 
sion, the Freedom Charter continued to circulate, passed from hand to hand 


in the revolutionary underground, its power to inspire hope and resistance 
undiminished. In the 1980s, it was picked up by a new generation of young 
militants who emerged in the townships. Fed up with patience and good be- 
havior and braced to do whatever it took to topple white domination, the 
young radicals stunned their parents with their fearlessness. They took to the 
streets without illusion, chanting, "Neither bullets nor tear gas will stop us." 
They faced massacre after massacre, buried friends, kept singing and kept 
coming. When the militants were asked what they were fighting against, they 
answered, "Apartheid" or "Racism"; asked what they were fighting for, many 
replied "Freedom" and, often, "The Freedom Charter." 

The charter enshrines the right to work, to decent housing, to freedom of 
thought, and, most radically, to a share in the wealth of the richest country in 
Africa, containing, among other treasures, the largest goldfield in the world. 
"The national wealth of our country, the heritage of South Africans, shall be 
restored to the people; the mineral wealth beneath the soil, the Banks and 
monopoly industry shall be transferred to the ownership of the people as a 
whole; all other industry and trade shall be controlled to assist the well-being 
of the people," the charter states. 6 

At the time of its drafting, the charter was viewed by some in the libera- 
tion movement as positively centrist, by others as unforgivably weak. The 
Pan-Africanists castigated the ANC for conceding too much to white colo- 
nizers (why did South Africa belong to "everyone, black and white?" they 
asked; the manifesto should have demanded, as the Jamaican black nation- 
alist Marcus Garvey had, "Africa for the Africans.") The staunch Marxists 
dismissed the demands as "petty bourgeois": it wasn't revolutionary to divide 
the ownership of the land among all people; Lenin said that private property 
itself must be abolished. 

What was taken as a given by all factions of the liberation struggle was that 
apartheid was not only a political system regulating who was allowed to vote 
and move freely. It was also an economic system that used racism to enforce 
a highly lucrative arrangement: a small white elite had been able to amass 
enormous profits from South Africa's mines, farms and factories because a 
large black majority was prevented from owning land and forced to provide 
its labor for far less than it was worth— and was beaten and imprisoned when 
it dared to rebel. In the mines, whites were paid up to ten times more than 
blacks, and, as in Latin America, the large industrialists worked closely with 
the military to have unruly workers disappeared. 7 


What the Freedom Charter asserted was the baseline consensus in the liber- 
ation movement that freedom would not come merely when blacks took con- 
trol of the state but when the wealth of the land that had been illegitimately 
confiscated was reclaimed and redistributed to the society as a whole. South 
Africa could no longer be a country with Californian living standards for 
whites and Congolese living standards for blacks, as the country was described 
during the apartheid years; freedom meant that it would have to find some- 
thing in the middle. 

That was what Mandela was confirming with his two-sentence note from 
prison: he still believed in the bottom line that there would be no freedom 
without redistribution. With so many other countries now also "in transition/' 
it was a statement with enormous implications. If Mandela led the ANC to 
power and nationalized the banks and the mines, the precedent would make 
it far more difficult for Chicago School economists to dismiss such proposals 
in other countries as relics of the past and insist that only unfettered free mar- 
kets and free trade had the ability to redress deep inequalities. 

On February 11, 1990, two weeks after writing that note, Mandela walked 
out of prison a free man, as close to a living saint as existed anywhere in the 
world. South Africa's townships exploded in celebration and renewed con- 
viction that nothing could stop the struggle for liberation. Unlike the move- 
ment in Eastern Europe, South Africa's was not beaten down but a 
movement on a roll. Mandela, for his part, was suffering from such an epic 
case of culture shock that he mistook a camera microphone for "some new- 
fangled weapon developed while I was in prison." 8 

It was definitely a different world from the one he had left twenty-seven 
years earlier. When Mandela was arrested in 1962, a wave of Third World 
nationalism was sweeping the African continent; now it was torn apart by 
war. While he was in prison, socialist revolutions had been ignited and ex- 
tinguished: Che Guevara had been killed in Bolivia in 1967; Salvador Al- 
lende had died in the coup of 1973; Mozambique's liberation hero and 
president, Samora Machel, had perished in a mysterious plane crash in 
1986. The late eighties and early nineties saw the fall of the Berlin Wall, 
the repression in Tiananmen Square and the collapse of Communism. 
Amid all this change there was little time for catching up: immediately on 
his release, Mandela had a people to lead to freedom while preventing a 
civil war and an economic collapse— both of which looked like distinct 


If there was a third path between Communism and capitalism— a way of 
democratizing the country and redistributing wealth at the same time — 
South Africa under the ANC looked uniquely positioned to turn that persis- 
tent dream into reality. It wasn't only the global outpouring of admiration 
and support for Mandela but also the particular way in which the anti- 
apartheid struggle had taken shape in the preceding years. In the eighties, it 
had become a truly global mass movement, and outside South Africa, the 
weapon that activists wielded most effectively was the corporate boycott- 
both of South African-made products and of international firms that did 
business with the apartheid state. The goal of the boycott strategy was to put 
enough of a squeeze on the corporate sector that it would lobby the intransi- 
gent South African government to end apartheid. But there was also a moral 
component to the campaign: many consumers firmly believed that compa- 
nies that were profiting from white supremacist laws deserved to take a fi- 
nancial hit. 

It was this attitude that gave the ANC a unique opportunity to reject the 
free-market orthodoxy of the day. Since there was already widespread agree- 
ment that corporations shared responsibility for the crimes of apartheid, the 
stage was set for Mandela to explain why key sectors of South Africa's econ- 
omy needed to be nationalized just as the Freedom Charter demanded. He 
could have used the same argument to explain why the debt accumulated 
under apartheid was an illegitimate burden to place on any new, popularly 
elected government. There would have been plenty of outrage from the 
IMF, the U.S. Treasury and the European Union in the face of such undis- 
ciplined behavior, but Mandela was also a living saint— there would have 
been enormous popular support for it as well. 

We will never know which of these forces would have proved more power- 
ful. In the years that passed between Mandela's writing his note from prison 
and the ANC's 1994 election sweep in which he was elected president, some- 
thing happened to convince the party hierarchy that it could not use its grass- 
roots prestige to reclaim and redistribute the country's stolen wealth. So, 
rather than meeting in the middle between California and the Congo, the 
ANC adopted policies that exploded both inequality and crime to such a de- 
gree that South Africa's divide is now closer to Beverly Hills and Baghdad. To- 
day, the country stands as a living testament to what happens when economic 
reform is severed from political transformation. Politically, its people have the 
right to vote, civil liberties and majority rule. Yet economically, South Africa 
has surpassed Brazil as the most unequal society in the world. 


I went to South Africa in 2005 to try to understand what had happened in 
the transition, in those key years between 1990 and 1994, to make Mandela 
take a route that he had described so unequivocally as "inconceivable." 

The ANC went into negotiations with the ruling National Party deter- 
mined to avoid the kind of nightmare that neighboring Mozambique had 
experienced when the independence movement forced an end to Por- 
tuguese colonial rule in 1975. On their way out the door, the Portuguese 
threw a vindictive temper tantrum, pouring cement down elevator shafts, 
smashing tractors and stripping the country of all they could carry. To its 
enormous credit, the ANC did negotiate a relatively peaceful handover. 
However, it did not manage to prevent South Africa's apartheid-era rulers 
from wreaking havoc on their way out the door. Unlike their counterparts 
in Mozambique, the National Party didn't pour concrete — their sabotage, 
equally crippling, was far subtler, and was all in the fine print of those his- 
toric negotiations. 

The talks that hashed out the terms of apartheid's end took place on two 
parallel tracks that often intersected: one was political, the other economic. 
Most of the attention, naturally, focused on the high-profile political sum- 
mits between Nelson Mandela and F. W. de Klerk, leader of the National 

De Klerk's strategy in these negotiations was to preserve as much power as 
possible. He tried everything— breaking the country into a federation, guar- 
anteeing veto power for minority parties, reserving a certain percentage of 
the seats in government structures for each ethnic group — anything to pre- 
vent simple majority rule, which he was sure would lead to mass land expro- 
priations and the nationalizing of corporations. As Mandela later put it, 
"What the National Party was trying to do was to maintain white supremacy 
with our consent." De Klerk had guns and money behind him, but his op- 
ponent had a movement of millions. Mandela and his chief negotiator, Cyril 
Ramaphosa, won on almost every count. 9 

Running alongside these often explosive summits were the much lower 
profile economic negotiations, primarily managed on the ANC side by 
Thabo Mbeki, then a rising star in the party, now South Africa's president. 
As the political talks progressed, and it became clear to the National Party 
that Parliament would soon be firmly in the hands of the ANC, the party of 
South Africa's elites began pouring its energy and creativity into the economic 
negotiations. South Africa's whites had failed to keep blacks from taking 


over the government, but when it came to safeguarding the wealth they had 
amassed under apartheid, they would not give up so easily. 

In these talks, the de Klerk government had a twofold strategy. First, draw- 
ing on the ascendant Washington Consensus that there was now only one way 
to run an economy, it portrayed key sectors of economic decision making— 
such as trade policy and the central bank— as "technical" or "administrative." 
Then it used a wide range of new policy tools— international trade agree- 
ments, innovations in constitutional law and structural adjustment programs — 
to hand control of those power centers to supposedly impartial experts, 
economists and officials from the IMF, the World Bank, the General Agree- 
ment on Tariffs and Trade (GATT) and the National Party— anyone except 
the liberation fighters from the ANC. It was a strategy of balkanization, not of 
the country's geography (as de Klerk had originally attempted) but of its 

This plan was successfully executed under the noses of ANC leaders, who 
were naturally preoccupied with winning the battle to control Parliament. In 
the process, the ANC failed to protect itself against a far more insidious 
strategy — in essence, an elaborate insurance plan against the economic 
clauses in the Freedom Charter ever becoming law in South Africa. "The 
people shall govern!" would soon become a reality, but the sphere over which 
they would govern was shrinking fast. 

While these tense negotiations between adversaries were unfolding, the 
ANC was also busily preparing within its own ranks for the day when it would 
take office. Teams of ANC economists and lawyers formed working groups 
charged with figuring out exactly how to turn the general promises of the 
Freedom Charter— for housing amentites and health care — into practical 
policies. The most ambitious of these plans was Make Democracy Work, an 
economic blueprint for South Africa's postapartheid future, written while 
the high-level negotiations were taking place. What the party loyalists didn't 
know at the time was that while they were hatching their ambitious plans, 
the negotiating team was accepting concessions at the bargaining table that 
would make their implementation a practical impossibility. "It was dead be- 
fore it was even launched," the economist Vishnu Padayachee told me of 
Make Democracy Work. By the time the draft was complete, "there was a 
new ball game." 

As one of the few classically trained economists active in the ANC, Pa- 
dayachee was enlisted to play a leading role in Make Democracy Work ("do- 
ing the number-crunching" as he puts it). Most of the people he worked 


alongside in those long policy meetings went on to top posts in the ANC 
government, but Padayachee did not. He has turned down all the offers of 
government jobs, preferring academic life in Durban, where he teaches, 
writes and owns the much-loved Ike's Bookshop, named after Ike Mayet, the 
first non-white South African bookseller. It was there, surrounded by care- 
fully preserved out-of-print volumes on African history, that we met to dis- 
cuss the transition. 

Padayachee entered the liberation struggle in the seventies, as an adviser to 
South Africa's trade union movement. "We all had the Freedom Charter 
stuck on the back of our doors in those days," he recalled. I asked him when 
he knew its economic promises were not going to be realized. He first sus- 
pected it, he said, in late 1993, when he and a colleague from the Make 
Democracy Work group got a call from the negotiating team who were in the 
final stages of haggling with the National Party. The call was a request for 
them to write a position paper on the pros and cons of making South Africa's 
central bank an independent entity, run with total autonomy from the 
elected government— oh, and the negotiators needed it by morning. 

"We were caught completely off guard," recalled Padayachee, now in his 
early fifties. He had done his graduate studies at Johns Hopkins University in 
Baltimore. He knew that at the time, even among free-market economists in 
the U.S., central bank independence was considered a fringe idea, a pet pol- 
icy of a handful of Chicago School ideologues who believed that central 
banks should be run as sovereign republics within states, out of reach of the 
meddling hands of elected lawmakers.* 10 For Padayachee and his col- 
leagues, who strongly believed that monetary policy needed to serve the new 
government's "big goals of growth, employment and redistribution," the 
ANC's position was a no-brainer: "There was not going to be an independent 
central bank in South Africa." 

Padayachee and a colleague stayed up all night writing a paper that gave 
the negotiating team the arguments it needed to resist this curveball from the 
National Party. If the central bank (in South Africa called the Reserve Bank) 
was run separately from the rest of the government, it could restrict the 
ANC's ability to keep the promises in the Freedom Charter. Besides, if the 
central bank was not accountable to the ANC government, to whom, exactly, 
would it be accountable? The IMF? The Johannesburg Stock Exchange? 

* Milton Friedman often joked that if he had his way. central banks would be based so purely 
on "economic science" that they would be run by giant computers— no humans required. 


Obviously, the National Party was trying to find a backdoor way to hold on to 
power even after it lost the elections— a strategy that needed to be resisted at 
all costs. "They were locking in as much as possible," Padayachee recalled. 
"That was a clear part of the agenda." 

Padayachee faxed the paper in the morning and didn't hear back for 
weeks. "Then, when we asked what happened, we were told, 'Well, we gave 
that one up/ " Not only would the central bank be run as an autonomous en- 
tity within the South African state, with its independence enshrined in the 
new constitution, but it would be headed by the same man who ran it under 
apartheid, Chris Stals. It wasn't just the central bank that the ANC had given 
up: in another major concession, Derek Keyes, the white finance minister 
under apartheid, would also remain in his post— much as the finance minis- 
ters and central bank heads from Argentina's dictatorship somehow man- 
aged to get their jobs back under democracy. The New York Times praised 
Keyes as "the country's ranking apostle of low-spending business-friendly 
government." 11 

Until that point, Padayachee said, "we were still buoyant, because, my 
God, this was a revolutionary struggle; at least there 'd be something to come 
out of it." When he learned that the central bank and the treasury would be 
run by their old apartheid bosses, it meant "everything would be lost in terms 
of economic transformation." When I asked him whether he thought the ne- 
gotiators realized how much they had lost, after some hesitation, he replied, 
"Frankly, no." It was simple horse-trading: "In the negotiations, something 
had to be given, and our side gave those things— I'll give you this, you give 
me that." 

From Padayachee's point of view, none of this happened because of some 
grand betrayal on the part of ANC leaders but simply because they were out- 
maneuvered on a series of issues that seemed less than crucial at the time— 
but turned out to hold South Africa's lasting liberation in the balance. 

What happened in those negotiations is that the ANC found itself caught in 
a new kind of web, one made of arcane rules and regulations, all designed to 
confine and constrain the power of elected leaders. As the web descended on 
the country, only a few people even noticed it was there, but when the new 
government came to power and tried to move freely, to give its voters the tan- 
gible benefits of liberation they expected and thought they had voted for, the 
strands of the web tightened and the administration discovered that its 


powers were tightly bound. Patrick Bond, who worked as an economic ad- 
viser in Mandela's office during the first years of ANC rule, recalls that the 
in-house quip was "Hey, we've got the state, where 's the power?" As the new 
government attempted to make tangible the dreams of the Freedom Charter, 
it discovered that the power was elsewhere. 

Want to redistribute land? Impossible— at the last minute, the negotia- 
tors agreed to add a clause to the new constitution that protects all private 
property, making land reform virtually impossible. Want to create jobs for 
millions of unemployed workers? Can't— hundreds of factories were actu- 
ally about to close because the ANC had signed on to the GATT, the pre- 
cursor to the World Trade Organization, which made it illegal to subsidize 
the auto plants and textile factories. Want to get free AIDS drugs to the 
townships, where the disease is spreading with terrifying speed? That vio- 
lates an intellectual property rights commitment under the WTO, which 
the ANC joined with no public debate as a continuation of the GATT. 
Need money to build more and larger houses for the poor and to bring free 
electricity to the townships? Sorry— the budget is being eaten up servicing 
the massive debt, passed on quietly by the apartheid government. Print 
more money? Tell that to the apartheid-era head of the central bank. Free 
water for all? Not likely. The World Bank, with its large in-country contin- 
gent of economists, researchers and trainers (a self-proclaimed "Knowledge 
Bank"), is making private-sector partnerships the service norm. Want to im- 
pose currency controls to guard against wild speculation? That would vio- 
late the $850 million IMF deal, signed, conveniently enough, right before 
the elections. Raise the minimum wage to close the apartheid income gap? 
Nope. The IMF deal promises "wage restraint." 12 And don't even think 
about ignoring these commitments — any change will be regarded as evi- 
dence of dangerous national untrustworthiness, a lack of commitment to 
"reform," an absence of a "rules-based system." All of which will lead to cur- 
rency crashes, aid cuts and capital flight. The bottom line was that South 
Africa was free but simultaneously captured; each one of these arcane 
acronyms represented a different thread in the web that pinned down the 
limbs of the new government. 

A longtime antiapartheid activist, Rassool Snyman, described the trap to 
me in stark terms. "They never freed us. They only took the chain from 
around our neck and put it on our ankles." Yasmin Sooka, a prominent 
South African human rights activist, told me that the transition "was business 


saying, 'We'll keep everything and you [the ANC] will rule in name. . . . You 
can have political power, you can have the fagade of governing, but the real 
governance will take place somewhere else.'"* 13 It was a process of infan- 
tilization that is common to so-called transitional countries — new govern- 
ments are, in effect, given the keys to the house but not the combination to 
the safe. 

Part of what I wanted to understand was how, after such an epic struggle 
for freedom, any of this could have been allowed to happen. Not just how the 
leaders of the liberation movement gave up the economic front, but how 
the ANC's base— people who had already sacrificed so much— let their 
leaders give it up. Why didn't the grassroots movement demand that the 
ANC keep the promises of the Freedom Charter and rebel against the con- 
cessions as they were being made? 

I put the question to William Gumede, a third-generation ANC activist 
who, as a leader of the student movement during the transition, was on the 
streets in those tumultuous years. "Everyone was watching the political ne- 
gotiations," he recalled, referring to the de Klerk-Mandela summits. "And if 
people felt it wasn't going well there would be mass protests. But when the 
economic negotiators would report back, people thought it was technical; 
no one was interested." This perception, he said, was encouraged by Mbeki, 
who portrayed the talks as "administrative" and of no popular concern 
(much like the Chileans with their "technified democracy"). As a result, he 
told me, with great exasperation, "We missed it! We missed the real story." 

Gumede, who today is one of South Africa's most respected investigative 
journalists, says he came to understand that it was in those "technical" meet- 
ings that the true future of his country was being decided— though few un- 
derstood it at the time. Like many people I spoke with, Gumede reminded 
me that South Africa was very much on the brink of civil war throughout the 
transition period— townships were being terrorized by gangs who had been 

* It was the Chicago Boys in Chile, fittingly, who pioneered this process of democracy- 
proofing capitalism, or building what they called "new democracy." In Chile, before handing 
over power to an elected government after seventeen years of junta rule, the Chicago Boys 
rigged the constitution and the courts so it was legally next to impossible to reverse their 
revolutionary laws. They had many names for this process: building a "technified democ- 
racy," a "protected democracy," or, as Pinochet's young minister Jose Pinera put it, ensuring 
"insulation from politics." Alvaro Bardon, Pinochet's undersecretary of the economy, ex- 
plained the classic Chicago School reasoning: "If we acknowledge economics as a science, 
this immediately implies less power for government or the political structure, since both 
lose responsibility for making such decisions." 


armed by the National Party, police massacres were still taking place, leaders 
were still being assassinated and there was constant talk of the country de- 
scending into a bloodbath. "I was focusing on the politics— mass action, go- 
ing to Bisho [site of a definitive showdown between demonstrators and 
police], shouting, 'Those guys must go!"' Gumede recalled. "But that was 
not the real struggle— the real struggle was over economics. And I am disap- 
pointed in myself for being so naive. I thought I was politically mature 
enough to understand the issues. How did I miss this?" 

Since then, Gumede has been making up for lost time. When we met, he 
was in the middle of a national firestorm sparked by his new book, Thabo 
Mbeki and the Battle for the Soul of the ANC. It is an exhaustive expose of 
precisely how the ANC negotiated away the country's economic sovereignty 
in those meetings he was too busy to pay attention to at the time. "I wrote the 
book out of anger," Gumede told me. "Anger at myself and at the party." 

It's hard to see how the outcome could have been different. If Padayachee 
is right and the ANC's own negotiators failed to grasp the enormity of what 
they were bargaining away, what chance was there for the movement's street 

During those key years when the deals were being signed, South Africans 
were in a constant state of crisis, ricocheting between the intense exuber- 
ance of watching Mandela walk free and the rage of learning that Chris 
Hani, the younger militant many hoped would succeed Mandela as leader, 
had been shot dead by a racist assassin. Other than a handful of economists, 
nobody wanted to talk about the independence of the central bank, a topic 
that works as a powerful soporific even under normal circumstances. 
Gumede points out that most people simply assumed that no matter what 
compromises had to be made to get into power, they could be unmade once 
the ANC was firmly in charge. "We were going to be the government— we 
could fix it later," he said. 

What ANC activists didn't understand at the time was that it was the na- 
ture of democracy itself that was being altered in those negotiations, 
changed so that— once the web of constraints had descended on their 
country— there would effectively be no later. 

In the first two years of ANC rule, the party still tried to use the limited re- 
sources it had to make good on the promise of redistribution. There was a 
flurry of public investment— more than a hundred thousand homes were 
built for the poor, and millions were hooked up to water, electricity and 


phone lines. 14 But, in a familiar story, weighed down by debt and under in- 
ternational pressure to privatize these services, the government soon began 
raising prices. After a decade of ANC rule, millions of people had been cut 
off from newly connected water and electricity because they couldn't pay 
the bills.* At least 40 percent of the new phones lines were no longer in ser- 
vice by 2003. 15 As for the "banks, mines and monopoly industry" that Man- 
dela had pledged to nationalize, they remained firmly in the hands of the 
same four white-owned megaconglomerates that also control 80 percent of 
the Johannesburg Stock Exchange. 16 In 2005, only 4 percent of the compa- 
nies listed on the exchange were owned or controlled by blacks. 17 Seventy 
percent of South Africa's land, in 2006, was still monopolized by whites, 
who are just 10 percent of the population. 18 Most distressingly, the ANC gov- 
ernment has spent far more time denying the severity of the AIDS crisis than 
getting lifesaving drugs to the approximately 5 million people infected with 
HIV, though there were, by early 2007, some positive signs of progress. 19 Per- 
haps the most striking statistic is this one: since 1990, the year Mandela left 
prison, the average life expectancy for South Africans has dropped by thir- 
teen years. 20 

Underlying all these facts and figures is a fateful choice made by the ANC 
after the leadership realized it had been outmaneuvered in the economic ne- 
gotiations. At that point, the party could have attempted to launch a second 
liberation movement and break free of the asphyxiating web that had been 
spun during the transition. Or it could simply accept its restricted power and 
embrace the new economic order. The ANC s leadership chose the second 
option. Rather than making the centerpiece of its policy the redistribution of 
wealth that was already in the country— the core of the Freedom Charter on 
which it had been elected — the ANC, once it became the government, ac- 
cepted the dominant logic that its only hope was to pursue new foreign in- 
vestors who would create new wealth, the benefits of which would trickle 
down to the poor. But for the trickle-down model to have a hope of working, 
the ANC government had to radically alter its behavior to make itself ap- 
pealing to investors. 

This was not an easy task, as Mandela had learned when he walked out of 
prison. As soon as he was released, the South African stock market collapsed 

* The question of whether more people have been cut off from new services than connected 
to them is highly contested in South Africa. At least one credible study has found that the cut- 
offs outnumber the connections: the government says it has connected nine million people 
to water; the study calculated ten million disconnections. 



in panic; South Africa's currency, the rand, dropped by 10 percent. 21 A few 
weeks later, De Beers, the diamond corporation, moved its headquarters 
from South Africa to Switzerland. 22 This kind of instant punishment from 
the markets would have been unimaginable three decades earlier, when 
Mandela was first imprisoned. In the sixties, it was unheard of for multina- 
tionals to switch nationalities on a whim and, back then, the world money 
system was still firmly linked to the gold standard. Now South Africa's cur- 
rency had been stripped of controls, trade barriers were down and most trad- 
ing was short-term speculation. 

Not only did the volatile market not like the idea of a liberated Mandela, 
but just a few misplaced words from him or his fellow ANC leaders could 
lead to an earth-shaking stampede by what the New York Times columnist 
Thomas Friedman has aptly termed "the electronic herd." 23 The stampede 
that greeted Mandela's release was just the start of what became a call-and- 
response between the ANC leadership and the financial markets— a shock 
dialogue that trained the party in the new rules of the game. Every time a top 
party official said something that hinted that the ominous Freedom Charter 
might still become policy, the market responded with a shock, sending the 
rand into free fall. The rules were simple and crude, the electronic equiva- 
lent of monosyllabic grunts: justice — expensive, sell; status quo — good, buy. 
When, shortly after his release, Mandela once again spoke out in favor of na- 
tionalization at a private lunch with leading businessmen, "the All-Gold In- 
dex plunged by 5 per cent." 24 

Even moves that seemed to have nothing to do with the financial world but 
betrayed some latent radicalism seemed to provoke a market jolt. When Trevor 
Manuel, an ANC minister, called rugby in South Africa a "white minority 
game" because its team was an all-white one, the rand took another hit. 25 

Of all the constraints on the new government, it was the market that 
proved most confining— and this, in a way, is the genius of unfettered capi- 
talism: it's self-enforcing. Once countries have opened themselves up to the 
global market's temperamental moods, any departure from Chicago School 
orthodoxy is instantly punished by traders in New York and London who bet 
against the offending country's currency, causing a deeper crisis and the 
need for more loans, with more conditions attached. Mandela acknowl- 
edged the trap in 1997, telling the ANC's national conference, "The very 
mobility of capital and the globalisation of the capital and other markets, 
make it impossible for countries, for instance, to decide national economic 
policy without regard to the likely response of these markets." 26 


The person inside the ANC who seemed to understand how to make the 
shocks stop was Thabo Mbeki, Mandela's right hand during his presidency 
and soon to be his successor. Mbeki had spent many of his years of exile in 
England, studying at the University of Sussex, then moving to London. In 
the eighties, while the townships of his country were flooded with tear gas, 
he was breathing in the fumes of Thatcherism. Of all the ANC leaders, 
Mbeki was the one who mingled most easily with business leaders, and be- 
fore Mandela's release, he organized several secret meetings with corporate 
executives who were afraid of the prospect of black majority rule. In 1985, 
after a night of drinking Scotch with Mbeki and a group of South African 
businesspeople at a Zambian game lodge, Hugh Murray, the editor of a pres- 
tigious business magazine, commented, "The ANC supremo has a remark- 
able ability to instill confidence, even in the most fraught circumstances." 27 

Mbeki was convinced that the key to getting the market to calm down was 
for the ANC to instill that kind of clubby confidence on a much larger scale. 
According to Gumede, Mbeki took on the role of free-market tutor within 
the party. The beast of the market had been unleashed, Mbeki would ex- 
plain; there was no taming it, just feeding it what it craved: growth and more 

So, rather than calling for the nationalization of the mines, Mandela and 
Mbeki began meeting regularly with Harry Oppenheimer, former chairman 
of the mining giants Anglo-American and De Beers, the economic symbols 
of apartheid rule. Shortly after the 1994 election, they even submitted the 
ANC's economic program to Oppenheimer for approval and made several 
key revisions to address his concerns, as well as those of other top industrial- 
ists. 28 Hoping to avoid getting another shock from the market, Mandela, in 
his first postelection interview as president, carefully distanced himself 
from his previous statements favoring nationalization. "In our economic 
policies . . . there is not a single reference to things like nationalization, and 
this is not accidental," he said. "There is not a single slogan that will connect 
us with any Marxist ideology."* 29 The financial press offered steady encour- 
agement for this conversion: "Though the ANC still has a powerful leftist 
wing," The Wall Street Journal observed, "Mr. Mandela has in recent days 
sounded more like Margaret Thatcher than the socialist revolutionary he 
was once thought to be." 30 

* In fact, the ANC's official economic platform, on which it had been elected, called for "in- 
creasing the public sector in strategic areas through, for example, nationalisation." Then 
there was the Freedom Charter, which continued to be the party's manifesto. 


The memory of its radical past still clung to the ANC, and despite the 
new government's best efforts to appear unthreatening, the market kept in- 
flicting its painful shocks: in a single month in 1996, the rand dropped 20 
percent, and the country continued to hemorrhage capital as South Africa's 
jittery rich moved their money offshore. 31 

Mbeki convinced Mandela that what was needed was a definitive break 
with the past. The ANC needed a completely new economic plan — 
something bold, something shocking, something that would communicate, 
in the broad, dramatic strokes the market understood, that the ANC was 
ready to embrace the Washington Consensus. 

As in Bolivia, where the shock therapy program was prepared with all the 
secrecy of a covert military operation, in South Africa only a handful of 
Mbeki's closest colleagues even knew that a new economic program was in 
the works, one very different from the promises they had all made during the 
1994 elections. Of the people on the team, Gumede writes, "all were sworn 
to secrecy and the entire process was shrouded in deepest confidentiality lest 
the left wing get wind of Mbeki's plan." 32 The economist Stephen Gelb, who 
took part in drafting the new program, admitted that "this was 'reform from 
above' with a vengeance, taking to an extreme the arguments in favour of in- 
sulation and autonomy of policymakers from popular pressures." 33 (This em- 
phasis on secrecy and insulation was particularly ironic given that, under the 
tyranny of apartheid, the ANC had pulled off a remarkably open and partic- 
ipatory process to come up with the Freedom Charter. Now, under a new or- 
der of democracy, the party was opting to hide its economic plans from its 
own caucus.) 

In June 1996, Mbeki unveiled the results: it was a neoliberal shock ther- 
apy program for South Africa, calling for more privatization, cutbacks to 
government spending, labor "flexibility," freer trade and even looser controls 
on money flows. According to Gelb, its overriding aim "was to signal to po- 
tential investors the government's (and specifically the ANC's) commitment 
to the prevailing orthodoxy." 34 To make sure the message was loud and clear 
to traders in New York and London, at the public launch of the plan, Mbeki 
quipped, "Just call me a Thatcherite." 35 

Shock therapy is always a market performance— that is part of its underly- 
ing theory. The stock market loves overhyped, highly managed moments 
that send stock prices soaring, usually provided by an initial public stock of- 
fering, the announcement of a huge merger or the hiring of a celebrity 
CEO. When economists urge countries to announce a sweeping shock 


therapy package, the advice is partially based on an attempt to imitate this 
kind of high-drama market event and trigger a stampede— but rather than 
selling an individual stock, they are selling a country. The hoped-for response 
is "Buy Argentine stocks!" "Buy Bolivian bonds!" A slower, more careful ap- 
proach, on the other hand, may be less brutal, but it deprives the market of 
these hype-bubbles, during which the real money gets made. Shock therapy 
is always a significant gamble, and in South Africa it didn't work: Mbeki's 
grand gesture failed to attract long-term investment; it resulted only in spec- 
ulative betting that ended up devaluing the currency even further. 

The Shock of the Base 

"The new convert is always more zealous at these things. They want to 
please even more," remarked the Durban-based writer Ashwin Desai when 
we met to discuss his memories of the transition. Desai spent time in jail 
during the liberation struggle, and he sees parallels between the psychology 
in prisons and the ANC's behavior in government. In prison, he said, "if you 
please the warden more, you get a better status. And that logic obviously 
transposed itself into some of the things that South African society did. They 
did want to somehow prove that they were much better prisoners. Much 
more disciplined prisoners than other countries, even." 

The ANC base, however, proved distinctly more unruly— which created a 
need for yet more discipline. According to Yasmin Sooka, one of the jurors 
on South Africa's Truth and Reconciliation Commission, the discipline 
mentality reached into every aspect of the transition — including the quest for 
justice. After hearing years of testimony about torture, killings and disap- 
pearances, the truth commission turned to the question of what kind of ges- 
tures could begin to heal the injustices. Truth and forgiveness were 
important, but so was compensation for the victims and their families. It 
made little sense to ask the new government to make compensation payouts, 
as these were not its crimes, and anything spent on reparations for apartheid 
abuses was money not spent building homes and schools for the poor in the 
newly liberated nation. 

Some commissioners felt that multinational corporations that had bene- 
fited from apartheid should be forced to pay reparations. In the end the 
Truth and Reconciliation Commission made the modest recommendation 
of a onetime 1 percent corporate tax to raise money for the victims, what it 
called "a solidarity tax." Sooka expected support for this mild recommendation 


from the ANC; instead, the government, then headed by Mbeki, rejected 
any suggestion of corporate reparations or a solidarity tax, fearing that it 
would send an antibusiness message to the market. "The president decided 
not to hold business accountable," Sooka told me. "It was that simple." In 
the end, the government put forward a fraction of what had been requested, 
taking the money out of its own budget, as the commissioners had feared. 

South Africa's Truth and Reconciliation Commission is frequently held 
up as a model of successful "peace building," exported to other conflict 
zones from Sri Lanka to Afghanistan. But many of those who were directly 
involved in the process are deeply ambivalent. When he unveiled the final 
report in March 2003, the commission's chairman, Archbishop Desmond 
Tutu, confronted journalists with freedom's unfinished business. "Can you 
explain how a black person wakes up in a squalid ghetto today, almost 10 
years after freedom? Then he goes to work in town, which is still largely 
white, in palatial homes. And at the end of the day, he goes back home to 
squalor? I don't know why those people don't just say, 'To hell with peace. To 
hell with Tutu and the truth commission.' " 36 

Sooka, who now heads South Africa's Foundation for Human Rights, 
says that she feels that although the hearings dealt with what she described 
as "outward manifestations of apartheid such as torture, severe ill treatment 
and disappearances," it left the economic system served by those abuses 
"completely untouched" — an echo of the concerns about the blindness of 
"human rights" expressed by Orlando Letelier three decades earlier. If she 
had the process to do over again, Sooka said, "I would do it completely dif- 
ferently. I would look at the systems of apartheid — I would look at the ques- 
tion of land, I would certainly look at the role of multinationals, I would 
look at the role of the mining industry very, very closely because I think 
that's the real sickness of South Africa. ... I would look at the systematic 
effects of the policies of apartheid, and I would devote only one hearing to 
torture because I think when you focus on torture and you don't look 
at what it was serving, that's when you start to do a revision of the real 

Reparations in Reverse 

The fact that the ANC dismissed the Commission's call for corporate repara- 
tions is particularly unfair, Sooka pointed out, because the government con- 
tinues to pay the apartheid debt. In the first years after the handover, it cost 


the new government 30 billion rand annually (about $4.5 billion) in 
servicing— a sum that provides a stark contrast with the paltry total of $85 
million that the government ultimately paid out to more than nineteen thou- 
sand victims of apartheid killings and torture and their families. Nelson 
Mandela has cited the debt burden as the single greatest obstacle to keeping 
the promises of the Freedom Charter. "That is 30 billion [rand] we did not 
have to build houses as we planned, before we came into government, to 
make sure that our children go to the best schools, that unemployment is 
properly addressed and that everybody has the dignity of having a job, a de- 
cent income, of being able to provide shelter to his beloved, to feed 
them. . . . We are limited by the debt that we inherited." 37 

Despite Mandela's acknowledgment that paying the apartheid bills has 
become a disfiguring burden, the party has opposed all suggestions that it de- 
fault. The fear is that even though there is a strong legal case that the debts 
are "odious," any move to default would make South Africa look danger- 
ously radical in the eyes of investors, thus provoking another market shock. 
Dennis Brutus, a longtime ANC member and a former prisoner on Robben 
Island, ran directly into that wall of fear. In 1998, seeing the financial stress 
the new government was under, he and a group of South African activists 
decided that the best way they could support the ongoing struggle was to start 
a "debt jubilee" movement. "I must say, I was so naive," Brutus, now in his 
seventies, told me. "I expected that the government would express apprecia- 
tion to us, that the grass roots are taking up the issue of debt, you know, that 
it would reinforce the government taking up debt." To his astonishment, "the 
government repudiated us and said, 'No, we don't accept your support.' " 

What makes the ANC's decision to keep paying the debt so infuriating to 
activists like Brutus is the tangible sacrifice made to meet each payment. For 
instance, between 1997 and 2004, the South African government sold eight- 
een state-owned firms, raising $4 billion, but almost half the money went to 
servicing the debt. 38 In other words, not only did the ANC renege on Man- 
dela's original pledge of "the nationalisation of the mines, banks and mo- 
nopoly industry" but because of the debt, it was doing the opposite — selling 
off national assets to make good on the debts of its oppressors. 

Then there is the matter of where, precisely, the money is going. During 
the transition negotiations, F. W. de Klerk's team demanded that all civil ser- 
vants be guaranteed their jobs even after the handover; those who wanted to 
leave, they argued, should receive hefty lifelong pensions. This was an ex- 
traordinary demand in a country with no social safety net to speak of, yet it 



was one of several "technical" issues on which the ANC ceded ground. 39 
The concession meant that the new ANC government carried the cost of two 
governments— its own, and a shadow white government that was out of 
power. Forty percent of the government's annual debt payments go to the 
country's massive pension fund. The vast majority of the beneficiaries are 
former apartheid employees.* 40 

In the end, South Africa has wound up with a twisted case of reparations 
in reverse, with the white businesses that reaped enormous profits from 
black labor during the apartheid years paying not a cent in reparations, but 
the victims of apartheid continuing to send large paychecks to their former 
victimizers. And how do they raise the money for this generosity? By strip- 
ping the state of its assets through privatization— a modern form of the very 
looting that the ANC had been so intent on avoiding when it agreed to ne- 
gotiations, hoping to prevent a repeat of Mozambique. Unlike what hap- 
pened in Mozambique, however, where civil servants broke machinery, 
stuffed their pockets and then fled, in South Africa the dismantling of the 
state and the pillaging of its coffers continue to this day. 

When I arrived in South Africa, the fiftieth anniversary of the signing of 
the Freedom Charter was approaching, and the ANC had decided to mark the 
event with a media spectacle. The plan was for Parliament to relocate for the 
day from its usual commanding home in Cape Town to the far more hum- 
ble surroundings of Kliptown, where the charter was first ratified. The South 
African president, Thabo Mbeki, was going to take the occasion to rename 
Kliptown's main intersection the Walter Sisulu Square of Dedication, after 
one of the ANC's most revered leaders. Mbeki would also inaugurate a 
new Freedom Charter Monument, a brick tower in which the words of the 
Charter had been engraved on stone tablets, and light an eternal "flame of 

* In fact, this one apartheid-era burden is simultaneously driving the growth of the country's 
overall debt and putting billions of rand of public money out of reach every year. A "technical" 
accounting change in 1989 switched the state pension fund from a "pay as you go" system, in 
which benefits are paid from contributions made in any given year, to a "fully funded" system, 
in which the fund has to have on hand enough capital to pay out 70 to 80 percent of its total Li- 
abilities at any given time— not a scenario it wiLl ever face. As a result, the fund ballooned from 
30 billion rand in 1989 to more than 300 billion rand in 2004— certainly qualifying as a debt 
shock. What this means for South Africans is that the huge pool of capital administered inde- 
pendently by the pension fund has been cordoned off and placed out of reach for spending on 
housing, health care or basic services. The pension agreement was actually negotiated on the 
ANC side by Joe Slovo, the legendary leader of the South African Communist Party, a fact that 
continues to be a source of great resentment in the country today. 


freedom." Adjacent to this building, work was progressing on another monu- 
ment, this one called the Freedom Towers, a pavilion of black and white 
concrete pillars designed to symbolize the charter's famous clause that says, 
"South Africa belongs to all those who live in it, black and white." 41 

The overall message of the event was hard to miss: fifty years ago, the party 
had promised to bring freedom to South Africa and now it had delivered — it 
was the ANC's own "mission accomplished" moment. 

Yet there was something strange about the event. Kliptown— an impover- 
ished township with dilapidated shacks, raw sewage in the streets and an un- 
employment rate of 72 percent, far higher than under apartheid— seems 
more like a symbol of the Freedom Charter's broken promises than an ap- 
propriate backdrop for such a slickly produced celebration. 42 As it turned 
out, the anniversary events were staged and art-directed not by the ANC but 
by an odd entity called Blue IQ. Though officially an arm of the provincial 
government, Blue IQ "operates in a carefully constructed environment 
which makes it look and feel more like a private sector company than a gov- 
ernment department," according to its very glossy, and very blue, brochure. 
Its goal is to drum up new foreign investment in South Africa — part of the 
ANC program of "re-distribution through growth." 

Blue IQ had identified tourism as a major growth area for investment, 
and its market research showed that for tourists visiting South Africa, a 
large part of the attraction is the ANC's global reputation for having tri- 
umphed over oppression. Hoping to build on this powerful draw, Blue IQ 
determined that there was no better symbol of the South African triumph- 
over-adversity narrative than the Freedom Charter. With that in mind, it 
launched a project to transform Kliptown into a Freedom Charter theme 
park, "a world-class tourist destination and heritage site offering local and 
international visitors a unique experience" — complete with museum, a 
freedom-themed shopping mall and a glass-and-steel Freedom Hotel. 
What is now a slum is set to be remade "into a desirous and prosperous" Jo- 
hannesburg suburb, while many of its current residents will be relocated to 
slums in less historic locales. 43 

With its plans to rebrand Kliptown, Blue IQ is following the free-market 
playbook— providing incentives for business to invest, in the hope that it will 
create jobs down the road. What sets this particular project apart is that, in 
Kliptown, the foundation on which the entire trickle-down apparatus rests is 
a fifty-year-old piece of paper that called for a distinctly more direct road to 
poverty elimination. Redistribute the land so millions can sustain themselves 


from it, demanded the framers of the Freedom Charter, and take back the 
mines so the bounty can be used to build houses and infrastructure and cre- 
ate jobs in the process. In other words, cut out the middleman. Those ideas 
may sound like Utopian populism to many ears, but after so many failed ex- 
periments in Chicago School orthodoxy, the real dreamers may be those 
who still believe that a scheme like the Freedom Charter theme park, which 
provided handouts to corporations while further disposessing the neediest 
people, will solve the pressing health and economic problems for the 22 mil- 
lion South Africans still living in poverty. 44 

After more than a decade since South Africa made its decisive turn to- 
ward Thatcherism, the results of its experiment in trickle-down justice are 

• Since 1994, the year the ANC took power, the number of people living 
on less than $1 a day has doubled, from 2 million to 4 million in 2006 45 

• Between 1991 and 2002, the unemployment rate for black South 
Africans more than doubled, from 23 percent to 48 percent. 46 

• Of South Africa's 35 million black citizens, only five thousand earn 
more than $60,000 a year. The number of whites in that income bracket 
is twenty times higher, and many earn far more than that amount. 47 

• The ANC government has built 1.8 million homes, but in the mean- 
time 2 million people have lost their homes. 48 

• Close to 1 million people have been evicted from farms in the first 
decade of democracy 49 

• Such evictions have meant that the number of shack dwellers has 
grown by 50 percent. In 2006, more than one in four South Africans 
lived in shacks located in informal shantytowns, many without run- 
ning water or electricity. 50 

Perhaps the best measure of the betrayed promises of freedom is the way the 
Freedom Charter is now regarded in different parts of South African society. 
Not so long ago, the document represented the ultimate threat to white priv- 
ilege in the country; today it is embraced in business lounges and gated 
communities as a statement of good intentions, at once flattering and totally 
unthreatening, on a par with a flowery corporate code of conduct. But in the 
townships where the document adopted in a field in Kliptown was once elec- 
tric with possibility, its promises are almost too painful to contemplate. Many 
South Africans boycotted the government-sponsored anniversary celebrations 


completely. "What is in the Freedom Charter is very good," S'bu Zikode, a 
leader of Durban's burgeoning shack dwellers' movement, told me. "But all 
I see is the betrayal." 

In the end, the most persuasive argument for abandoning the redistribution 
promises of the Freedom Charter was the least imaginative one: everyone is 
doing it. Vishnu Padayachee summed up for me the message that the ANC 
leadership was getting from the start from "Western governments, the IMF 
and the World Bank. They would say, The world has changed; none of that 
left stuff means anything anymore; this is the only game in town.'" As 
Gumede writes, "It was an onslaught for which the ANC was wholly unpre- 
pared. Key economic leaders were regularly ferried to the head offices of in- 
ternational organizations such as the World Bank and IMF, and during 1992 
and 1993 several ANC staffers, some of whom had no economic qualifica- 
tions at all, took part in abbreviated executive training programs at foreign 
business schools, investment banks, economic policy think tanks and the 
World Bank, where they were 'fed a steady diet of neo-liberal ideas.' It was a 
dizzying experience. Never before had a government-in-waiting been so se- 
duced by the international community." 51 

Mandela received a particularly intense dose of this elite form of schoolyard 
peer pressure when he met with European leaders at the 1992 World Eco- 
nomic Forum in Davos. When he pointed out that South Africa wanted to do 
nothing more radical than what Western Europe had done under the Marshall 
Plan after the Second World War, the Dutch minister of finance dismissed the 
parallel. "That was what we understood then. But the economies of the world 
are interdependent. The process of globalization is taking root. No economy 
can develop separately from the economies of other countries." 52 

As leaders like Mandela traveled the globalization circuit, it was pounded 
into them that even the most left-wing governments were embracing the 
Washington Consensus: the Communists in Vietnam and China were doing 
it, and so were the trade unionists in Poland and the social democrats in 
Chile, finally free from Pinochet. Even Russians had seen the neoliberal 
light— at the time the ANC was in its heaviest negotiations, Moscow was in 
the midst of a corporatist feeding frenzy, selling off its state assets to 
apparatchiks-turned-entrepreneurs as fast as it could. If Moscow had given 
in, how could a raggedy band of freedom fighters in South Africa resist such 
a forceful global tide? 

That, at least, was the message being peddled by the lawyers, economists 


and social workers who made up the rapidly expanding "transition" industry— 
the teams of experts who hop from war-torn country to crisis-racked city, 
regaling overwhelmed new politicians with the latest best practice from 
Buenos Aires, the most inspiring success story from Warsaw, the most fear- 
some roar from the Asian Tigers. "Transitionologists" (as the NYU political 
scientist Stephen Cohen has called them) have a built-in advantage over the 
politicians they advise: they are a hypermobile class, while the leaders of lib- 
eration movements are inherently inward-looking. 53 By their very nature, 
people spearheading intense national transformations are narrowly focused 
on their own narratives and power struggles, often unable to pay close atten- 
tion to the world beyond their borders. That's unfortunate, because if the 
ANC leadership had been able to cut through the transitionology spin and 
find out for itself what was really going on in Moscow, Warsaw, Buenos Aires 
and Seoul, it would have seen a very different picture. 




Pieces of a living city cannot be auctioned off without taking into 
consideration that there are indigenous traditions, even if they 
seem odd to foreigners. . . . But these are our traditions and our 
city. For a long time we lived under the dictatorship of the Com- 
munists, but now we have found out that life under the dictator- 
ship of business people is no better. They couldn't care less about 
what country they are in. 
— Grigory Gorin, Russian writer, 1993 1 

Spread the truth— the laws of economics are like the laws of engi- 
neering. One set of laws works everywhere. 

—Lawrence Summers, chief economist of the World Bank, 1 991 2 

When Soviet president Mikhail Gorbachev flew to London to attend his first 
G7 Summit in July 1991, he had every reason to expect a hero's welcome. 
For the previous three years, he had seemed not so much to stride across the 
international stage as to float, charming the media, signing disarmament 
treaties and picking up peace prizes, including the Nobel in 1990. 

He had even managed to do the previously unthinkable: win over the 
American public. The Russian leader so thoroughly challenged Evil Empire 
caricatures that the U.S. press had taken to calling him by a cuddly nick- 
name, "Gorby," and in 1987, Time magazine took the risky decision of mak- 
ing the Soviet president their Man of the Year. The editors explained that 
unlike his predecessors ("gargoyles in fur hats"), Gorbachev was Russia's 


own Ronald Reagan — "a Kremlin version of the Great Communicator." The 
Nobel Prize committee declared that thanks to his work, "It is our hope that 
we are now celebrating the end of the Cold War." 3 

By the beginning of the nineties, with his twin policies of glasnost (open- 
ness) and perestroika (restructuring), Gorbachev had led the Soviet Union 
through a remarkable process of democratization: the press had been freed, 
Russia's parliament, local councils, president and vice president had been 
elected, and the constitutional court was independent. As for the economy, 
Gorbachev was moving toward a mixture of a free market and a strong safety 
net, with key industries under public control— a process he predicted would 
take ten to fifteen years to be completed. His end goal was to build social 
democracy on the Scandinavian model, "a socialist beacon for all 
mankind." 4 

At first it seemed that the West also wanted Gorbachev to succeed in loos- 
ening up the Soviet economy and transforming it into something close to 
Sweden's. The Nobel Committee explicitly described the prize as a way of 
offering support to the transition — "a helping hand in an hour of need." And 
on a visit to Prague, Gorbachev made it clear that he couldn't do it all alone: 
"Like mountain climbers on one rope, the world's nations can either climb 
together to the summit or fall together into the abyss," he said. 5 

So what happened at the G7 meeting in 1991 was totally unexpected. 
The nearly unanimous message that Gorbachev received from his fellow 
heads of state was that, if he did not embrace radical economic shock therapy 
immediately, they would sever the rope and let him fall. "Their suggestions 
as to the tempo and methods of transition were astonishing," Gorbachev 
wrote of the event. 6 

Poland had just completed its first round of shock therapy under the 
IMF's and Jeffrey Sachs's tutelage, and the consensus among British prime 
minister John Major, U.S. president George H. W. Bush, Canadian prime 
minister Brian Mulroney and Japanese prime minister Toshiki Kaifu was that 
the Soviet Union had to follow Poland's lead on an even faster timetable. Af- 
ter the meeting, Gorbachev got the same marching orders from the IMF, the 
World Bank and every other major lending institution. Later that year, when 
Russia asked for debt forgiveness to weather a catastrophic economic crisis, 
the stern answer was that the debts had to be honored. 7 Since the time when 
Sachs had marshaled aid and debt relief for Poland, the political mood had 
changed — it was meaner. 

What happened next— the dissolution of the Soviet Union, Gorbachev's 


eclipse by Yeltsin, and the tumultuous course of economic shock therapy in 
Russia — is a well-documented chapter of contemporary history. It is, how- 
ever, a story too often told in the bland language of "reform," a narrative so 
generic that it has hidden one of the greatest crimes committed against a 
democracy in modern history. Russia, like China, was forced to choose be- 
tween a Chicago School economic program and an authentic democratic 
revolution. Faced with that choice, China s leaders had attacked their own 
people in order to prevent democracy from disturbing their free-market 
plans. Russia was different: the democratic revolution was already well 
under way— in order to push through a Chicago School economic program, 
that peaceful and hopeful process that Gorbachev began had to be violently 
interrupted, then radically reversed. 

Gorbachev knew that the only way to impose the kind of shock therapy be- 
ing advocated by the G7 and the IMF was with force— as did many in the 
West pushing for these policies. The Economist magazine, in an influential 
1990 piece, urged Gorbachev to adopt "strong-man rule ... to smash the re- 
sistance that has blocked serious economic reform." 8 Only two weeks after 
the Nobel Committee had declared an end to the Cold War, The Economist 
was urging Gorbachev to model himself after one of the Cold War's most no- 
torious killers. Under the heading "Mikhail Sergeevich Pinochet?" the arti- 
cle concluded that even though following its advice could cause "possible 
blood-letting ... it might, just might, be the Soviet Union s turn for what could 
be called the Pinochet approach to liberal economics." The Washington Post 
was willing to go further. In August 1991, the paper ran a commentary under 
the headline "Pinochets Chile a Pragmatic Model for Soviet Economy." The 
article supported the idea of a coup for getting rid of the slow-going Gor- 
bachev, but the author, Michael Schrage, worried that the Soviet presidents 
opponents "had neither the savvy nor the support to seize the Pinochet op- 
tion." They should model themselves, Schrage wrote, after "a despot who re- 
ally knew how to run a coup: retired Chilean general Augusto Pinochet." 9 

Gorbachev soon found himself facing an adversary who was more than 
willing to play the role of a Russian Pinochet. Boris Yeltsin, though holding 
the post of Russian president, had a much lower profile than Gorbachev, who 
headed all the Soviet Union. That was to change dramatically on August 19, 
1991, one month after the G7 Summit. A group from the Communist old 
guard drove tanks up to the White House, as the Russian parliament building 
is called. In a bid to halt the democratization process, they threatened to attack 


the country's first elected parliament. Amid a crowd of Russians determined 
to defend their new democracy, Yeltsin stood on one of the tanks and de- 
nounced the aggression as "a cynical, right-wing coup attempt." 10 The tanks 
retreated, and Yeltsin emerged as a courageous defender of democracy. One 
demonstrator who stood in the streets that day described it as "the first time I 
felt that I could really affect the situation in my country. Our souls soared. It 
was such a feeling of unity. We felt invincible." 11 

And so did Yeltsin. As a leader, he had always been a kind of anti- 
Gorbachev. Where Gorbachev had projected propriety and sobriety (one of 
his most controversial measures was an aggressive anti-vodka-drinking cam- 
paign), Yeltsin was a notorious glutton and a heavy drinker. Prior to the 
coup, many Russians harbored reservations about Yeltsin, but he had helped 
save democracy from a Communist coup, and that made him, at least for the 
time being, a people's hero. 

Yeltsin immediately parlayed his triumphant showdown into increased 
political power. As long as the Soviet Union remained intact, he would al- 
ways have less control than Gorbachev, but in December 1991, four months 
after the aborted coup, Yeltsin pulled off a political masterstroke. He formed 
an alliance with two other Soviet republics, a move that had the effect of 
abruptly dissolving the Soviet Union, thereby forcing Gorbachev's resigna- 
tion. The abolition of the Soviet Union, "the only country most Russians had 
ever known," was a powerful shock to the Russian psyche — and as the politi- 
cal scientist Stephen Cohen put it, it was the first of "three traumatic shocks" 
that Russians would endure over the next three years. 12 

Jeffrey Sachs was in the room at the Kremlin on the day Yeltsin an- 
nounced that the Soviet Union was no more. Sachs recalled the Russian 
president saying, "'Gentlemen, I just want to announce that the Soviet 
Union has ended. . . .' And I said, 'Gee, you know, this is once in a century. 
This is the most incredible thing you can imagine; this is a true liberation; 
let's help these people.'" 13 Yeltsin had invited Sachs to come to Russia to 
serve as an adviser, and Sachs was more than game: "If Poland can do it, so 
can Russia," he declared. 14 

But Yeltsin didn't just want advice, he wanted the kind of gold-plated 
fund-raising that Sachs had pulled off for Poland. "The only hope," Yeltsin 
said, "was the promises of the Group of Seven quickly to grant us large sums 
of financial aid." 15 Sachs told Yeltsin he was confident that if Moscow was 
willing to go with the "big bang" approach to establishing a capitalist 


economy, he could raise something in the area of $1 5 billion. 16 They would 
need to be ambitious, and they would need to move fast. What Yeltsin did 
not know was that Sachs's luck was about to run out. 

Russia's conversion to capitalism had much in common with the corrupt 
approach that had sparked the Tiananmen Square protests in China two 
years earlier. Moscow's mayor, Gavriil Popov, has claimed that there were re- 
ally only two options for how to break up the centrally controlled economy: 
"Property can be divided among all members of society, or the best pieces 
can be given to the leaders. ... In a word, there's the democratic approach, 
and there's the nomenklatura, apparatchik approach." 17 Yeltsin took the lat- 
ter approach— and he was in a hurry. In late 1991, he went to the parliament 
and made an unorthodox proposal: if they gave him one year of special pow- 
ers, under which he could issue laws by decree rather than bring them to par- 
liament for a vote, he would solve the economic crisis and give them back a 
thriving, healthy system. What Yeltsin was asking for was the kind of execu- 
tive power enjoyed by dictators, not democrats, but the parliament was still 
grateful to the president for his role during the attempted coup, and the 
country was desperate for foreign aid. The answer was yes: Yeltsin could have 
one year of absolute power to remake Russia's economy. 

He immediately assembled a team of economists, many of whom, in the 
final years of Communism, had formed a kind of free-market book club, 
reading the basic texts of the Chicago School thinkers and discussing how 
the theories could be applied in Russia. Though they had never studied in 
the U.S., they were such devoted fans of Milton Friedman that the Russian 
press took to calling Yeltsin's team "the Chicago Boys," a knock-off of the 
original title, and fitting in the context of Russia's thriving black market 
economy. In the West they were dubbed "the young reformers." The group's 
figurehead was Yegor Gaidar, whom Yeltsin named as one of his two deputy 
prime ministers. Pyotr Aven, a Yeltsin minister in 1991-92 who was part of 
this inner circle, said of his former clique, "Their identification of themselves 
with God, which flowed naturally from their belief in their all-round superi- 
ority, was, unfortunately, typical of our reformers." 18 

Surveying the group that had suddenly ascended to power in Moscow, the 
Russian newspaper Nezavisimaya Gazeta observed the rather astonishing 
development that "for the first time Russia will get in its government a team 
of liberals who consider themselves followers of Friedrich von Hayek and the 
'Chicago school' of Milton Friedman." Their policies were "quite clear— 'strict 
financial stabilization' according to 'shock therapy' recipes." At the same 


time as Yeltsin made these appointments, the newspaper noted, he had also 
put the notorious strongman Yury Skokov "in charge of the defense and re- 
pressive departments: the Army, the Ministry of Internal Affairs and the State 
Security Committee." The decisions were clearly connected: "Probably the 
'strong' Skokov can 'ensure' strict stabilization in politics while the 'strong' 
economists guarantee it in the economy." The article ended with a predic- 
tion: "It will come as no surprise if they attempt to construct something like 
a homegrown Pinochet system, in which the role of the 'Chicago boys' will 
be played by Gaidar's team." 19 

To provide ideological and technical backup for Yeltsin's Chicago Boys, 
the U.S. government funded its own transition experts whose jobs ranged 
from writing privatization decrees, to launching a New York-style stock ex- 
change, to designing a Russian mutual fund market. In the fall of 1992, US- 
AID awarded a $2.1 million contract to the Harvard Institute for International 
Development, which sent teams of young lawyers and economists to shadow 
the Gaidar team. In May 1995, Harvard named Sachs director of the Har- 
vard Institute for International Development, which meant that he played 
two roles in Russia's reform period: he began as a freelance adviser to Yeltsin, 
then moved on to overseeing Harvard's large Russia outpost, funded by the 
U.S. government. 

Once again a group of self-described revolutionaries huddled in secret 
to write a radical economic program. As Dimitry Vasiliev, one of the key re- 
formers, recalled, "At the start, we didn't have a single employee, not even a 
secretary. We didn't have any equipment, not even a fax machine. And in 
those conditions, in just a month and a half, we had to write a comprehen- 
sive privatization program, we had to write twenty normative laws. ... It was 
a really romantic period." 20 

On October 28, 1991, Yeltsin announced the lifting of price controls, pre- 
dicting that "the liberalization of prices will put everything in its right 
place." 21 The "reformers" waited only one week after Gorbachev resigned to 
launch their economic shock therapy program— the second of the three 
traumatic shocks. The shock therapy program also included free-trade poli- 
cies and the first phase of the rapid-fire privatization of the country's approx- 
imately 225,000 state-owned companies. 22 

"The country was taken by surprise by the 'Chicago School' program," 
one of Yeltsin's original economic advisers recalled. 23 That surprise was de- 
liberate, part of Gaidar's strategy of unleashing change so suddenly and 
quickly that resistance would be impossible. The problem his team was up 


against was the usual one: the threat of democracy obstructing their plans. 
Russians did not want their economy organized by a Communist central 
committee, but most still believed firmly in wealth redistribution and in an 
activist role for government. Like the Polish supporters of Solidarity, 67 per- 
cent of Russians told pollsters in 1992 they believed workers' cooperatives 
were the most equitable way to privatize the assets of the Communist state, 
and 79 percent said they considered maintaining full employment to be a 
core function of government. 24 That meant that if Yeltsin's team had submit- 
ted their plans to democratic debate, rather than launching a stealth attack 
on an already deeply disoriented public, the Chicago School revolution 
would not have stood a chance. 

Vladimir Mau, an adviser to Boris Yeltsin in this period, explained that 
"the most favorable condition for reform" is a "weary public, exhausted by 
the previous political struggle. . . . That is why the government was confi- 
dent, on the eve of price liberalization, that a drastic social clash was impos- 
sible, that the government would not be overthrown by a popular revolt." 
The vast majority of Russians — 70 percent— were opposed to lifting price 
controls, he explained, but "we could see that the people, then and now, 
were concentrating on the yields of their private [garden] plots and in gen- 
eral on their individual economic circumstances." 25 

Joseph Stiglitz, who at the time was serving as chief economist at the 
World Bank, summarized the mentality that guided the shock therapists. His 
metaphors should by now be familiar: "Only a blitzkrieg approach during 
the 'window of opportunity' provided by the 'fog of transition' would get the 
changes made before the population had a chance to organize to protect its 
previous vested interests." 26 In other words, the shock doctrine. 

Stiglitz called Russia's reformers "market Bolsheviks" for their fondness 
for cataclysmic revolution. 27 However, where the original Bolsheviks fully in- 
tended to build their centrally planned state in the ashes of the old, the mar- 
ket Bolsheviks believed in a kind of magic: if the optimal conditions for 
profit making were created, the country would rebuild itself, no planning re- 
quired. (It was a faith that would reemerge, a decade later, in Iraq.) 

Yeltsin made wild promises that "for approximately six months, things 
will be worse," but then the recovery would begin, and soon enough Russia 
would be an economic titan, one of the top four economies in the world. 28 
This logic of so-called creative destruction resulted in scarce creation and 
spiraling destruction. After only one year, shock therapy had taken a devas- 
tating toll: millions of middle-class Russians had lost their life savings when 


money lost its value, and abrupt cuts to subsidies meant millions of workers 
had not been paid in months. 29 The average Russian consumed 40 percent 
less in 1992 than in 1991, and a third of the population fell below the 
poverty line. 30 The middle class was forced to sell personal belongings from 
card tables on the streets— desperate acts that the Chicago School econo- 
mists praised as "entrepreneurial," proof that a capitalist renaissance was in- 
deed under way, one family heirloom and second-hand blazer at a time. 31 

As in Poland, Russians did, eventually, regain their bearings and began to 
demand an end to the sadistic economic adventure ("no more experiments" 
was a popular piece of graffiti in Moscow at the time). Under pressure from 
voters, the country's elected parliament— the same body that had supported 
Yeltsin's rise to power— decided it was time to rein in the president and his 
ersatz Chicago Boys. In December 1992, they voted to unseat Yegor Gaidar, 
and three months later, in March 1993, the parliamentarians voted to repeal 
the special powers they had given to Yeltsin to impose his economic laws by 
decree. The grace period had expired, and the results were abysmal; from 
now on, laws had to go through parliament, a standard measure in any lib- 
eral democracy and following the procedures set out in Russia's constitution. 

The deputies were acting within their rights, but Yeltsin had grown ac- 
customed to his augmented powers and had come to think of himself less as 
a president and more as a monarch (he had taken to calling himself Boris I). 
He retaliated against the parliament's "mutiny" by going on television and 
declaring a state of emergency, which conveniently restored his imperial 
powers. Three days later, Russia's independent Constitutional Court (the 
creation of which was one of Gorbachev's most significant democratic 
breakthroughs) ruled 9-3 that Yeltsin's power grab violated, on eight differ- 
ent counts, the constitution he had sworn to uphold. 

Until this point, it had still been possible to present "economic reform" 
and democratic reform as part of the same project in Russia. But once 
Yeltsin declared a state of emergency, the two projects were on a collision 
course, with Yeltsin and his shock therapists in direct opposition to the 
elected parliament and the constitution. 

Nevertheless, the West threw its weight behind Yeltsin, who was still cast in 
the role of a progressive "genuinely committed to freedom and democracy, 
genuinely committed to reform," in the words of then U.S. president Bill 
Clinton. 32 The majority of the Western press also sided with Yeltsin against 
the entire parliament, whose members were dismissed as "communist hard- 
liners" trying to roll back democratic reforms. 33 They suffered, according to 


the New York Times Moscow bureau chief, from "a Soviet mentality— 
suspicious of reform, ignorant of democracy, disdainful of intellectuals or 
'democrats/ " 34 

In fact, these were the same politicians, for all their flaws (and with 1,041 
deputies there were plenty), who had stood with Yeltsin and Gorbachev 
against the coup by the hardliners in 1991, who had voted to dissolve the 
Soviet Union and who had, until recently, thrown their support behind 
Yeltsin. Yet The Washington Post opted to cast Russia's parliamentarians as 
"antigovernment" — as if they were interlopers and not themselves part of 
the government. 35 

In the spring of 1993, the collision drew closer when parliament brought 
forward a budget bill that did not follow IMF demands for strict austerity. 
Yeltsin responded by trying to eliminate the parliament. He hastily threw to- 
gether a referendum, supported in Orwellian fashion by the press, which 
asked voters if they agreed to dissolve parliament and hold snap elections. 
Not enough voters turned out to give Yeltsin the mandate he needed. He 
still claimed victory, however, maintaining that the exercise proved the 
country was behind him, because he had slipped in an entirely non-binding 
question about whether voters supported his reforms. A slim majority said 
yes. 36 

In Russia, the referendum was widely seen as a propaganda exercise, and 
a failed one at that. The reality was that Yeltsin and Washington were still 
stuck with a parliament that had the constitutional right to do what it was do- 
ing: slowing down the shock therapy transformation. An intense pressure 
campaign began. Lawrence Summers, then U.S. Treasury undersecretary, 
warned that "the momentum for Russian reform must be reinvigorated and 
intensified to ensure sustained multilateral support." 37 The IMF got the mes- 
sage, and an unnamed official leaked to the press that a promised $1.5 bil- 
lion loan was being rescinded because the IMF was "unhappy with Russia's 
backtracking on reforms." 38 Pyotr Aven, the former Yeltsin minister, said, 
"The maniacal obsession of the IMF with budgetary and monetary policy, 
and its absolutely superficial and formal attitude to everything else . . . 
played not a small role in what happened." 39 

What happened was that the day after the IMF leak, Yeltsin, confident 
that he had the West's support, took his first irreversible step toward what was 
now being openly referred to as the "Pinochet option": he issued decree 1400, 
announcing that the constitution was abolished and parliament dissolved. 
Two days later, a special session of parliament voted 636-2 to impeach 


Yeltsin for this outrageous act (the equivalent of the U.S. president unilater- 
ally dissolving Congress). Vice President Aleksandr Rutskoi announced that 
Russia had already "paid a dear price for the political adventurism" of Yeltsin 
and the reformers. 40 

Some kind of armed conflict between Yeltsin and the parliament was now 
inevitable. Despite the fact that Russia's Constitutional Court once again 
ruled Yeltsin's behavior unconstitutional, Clinton continued to back him, 
and Congress voted to give Yeltsin $2.5 billion in aid. Emboldened, Yeltsin 
sent in troops to surround the parliament and got the city to cut off power, 
heat and phone lines to the White House parliament building. Boris Kagarl- 
itsky, director of the Institute of Globalization Studies in Moscow, told me 
that supporters of Russian democracy "were coming in by the thousands try- 
ing to break the blockade. There were two weeks of peaceful demonstrations 
confronting the troops and police forces, which led to partial unblocking of 
the parliament building, with people able to bring food and water inside. 
Peaceful resistance was growing more popular and gaining broader support 
every day." 

With each side becoming more entrenched, the only compromise that 
could have resolved the standoff would have been for both sides to agree to 
early elections, putting everybody's job up for public review. Many were urg- 
ing this outcome, but just as Yeltsin was weighing his options, and reportedly 
leaning toward elections, news came from Poland that voters had rained 
down their decisive punishment on Solidarity, the party that had betrayed 
them with shock therapy. 

After they witnessed Solidarity get pounded at the polls, it was obvious to 
Yeltsin and his Western advisers that early elections were far too risky. In 
Russia, too much wealth hung in the balance: huge oil fields, about 30 per- 
cent of the world's natural gas reserves, 20 percent of its nickel, not to men- 
tion weapons factories and the state media apparatus with which the 
Communist Party had controlled the vast population. 

Yeltsin abandoned negotiations and moved into war posture. Having just 
doubled military salaries, he had most of the army on his side, and he "sur- 
rounded the parliament with thousands of Interior Ministry troops, barbed 
wire and water cannons and refused to let anyone pass," according to The 
Washington Post. 41 Vice President Rutskoi, Yeltsin's main rival in parlia- 
ment, had by this point armed his guards and welcomed proto-fascist nation- 
alists into his camp. He urged his supporters to "not give a moment of 
peace" to Yeltsin's "dictatorship." 42 Kagarlitsky, who participated in the 


protests and wrote a book about the episode, told me that on October 3, 
crowds of supporters of the parliament "marched to the Ostankino TV center 
to demand that news be announced. Some people in the crowd were armed, 
but most were not. There were children in the crowd. It was met by Yeltsin's 
troops and machine-gunned." About one hundred demonstrators, and one 
member of the military, were killed. Yeltsin's next move was to dissolve all 
city and regional councils in the country. Russia's young democracy was be- 
ing destroyed piece by piece. 

There is no doubt that some parliamentarians showed antipathy for a 
peaceful settlement by egging on the crowds, but as even the former U.S. 
State Department official Leslie Gelb wrote, the parliament was "not dom- 
inated by a bunch of right-wing crazies." 43 It was Yeltsin's illegal dissolu- 
tion of parliament and his defiance of the country's highest court that 
precipitated the crisis — moves that were bound to be met by desperate 
measures in a country that had little desire to give up the democracy it had 
just won.* 

A clear signal from Washington or the EU could have forced Yeltsin to 
engage in serious negotiations with the parliamentarians, but he received 
only encouragement. Finally, on the morning of October 4, 1993, Yeltsin 
fulfilled his long-prescribed destiny and became Russia's very own Pinochet, 
unleashing a series of violent events with unmistakable echoes of the coup in 
Chile exactly twenty years earlier. In what was the third traumatic shock in- 
flicted by Yeltsin on the Russian people, he ordered a reluctant army to 
storm the Russian White House, setting it on fire and leaving charred the 
very building he had built his reputation defending just two years earlier. 
Communism may have collapsed without the firing of a single shot, but 
Chicago-style capitalism, it turned out, required a great deal of gunfire to de- 
fend itself: Yeltsin called in five thousand soldiers, dozens of tanks and ar- 
mored personnel carriers, helicopters and elite shock troops armed with 
automatic machine guns— all to defend Russia's new capitalist economy 
from the grave threat of democracy. 

This is how The Boston Globe reported on Yeltsin's parliamentary siege: 

* In one of the most remarkable bits of sensational reporting, The Washington Post noted, 
"About 200 demonstrators then surged to Russia's Defense Ministry, where the nation's nu- 
clear controls are located and its top generals were meeting"— raising the absurd prospect 
that the crowd of Russians attempting to defend their democracy might start a nuclear war. 
"The ministry locked its doors and kept the crowd out without incident," reported The Post. 


"For 10 hours yesterday, about 30 Russian army tanks and armored person- 
nel carriers encircled the parliament building in downtown Moscow, known 
as the White House, and pelted it with explosive rounds, while infantry 
troops sprayed machine-gun fire. At 4:15 p.m., about 300 guards, congres- 
sional deputies and staff workers marched single-file out of the building with 
their hands up." 44 

By the end of the day, the all-out military assault had taken the lives of ap- 
proximately five hundred people and wounded almost a thousand, the most 
violence Moscow had seen since 191 7. 45 Peter Reddaway and Dmitri Glin- 
ski, who wrote the definitive account of the Yeltsin years (The Tragedy of 
Russia's Reforms: Market Bolshevism against Democracy), point out that 
"during the mopping-up operation in and around the White House, 1,700 
persons had been arrested, and 1 1 weapons seized. Some of the arrested 
were interned in a sports stadium, recalling the procedures used by Pinochet 
after the 1973 coup in Chile." 46 Many were taken to police stations, where 
they were severely beaten. Kagarlitsky recalls that while he was being struck 
on the head, an officer shouted, "You wanted democracy, you sons of 
bitches? We'll show you democracy!" 47 

But Russia wasn't a repeat of Chile — it was Chile in reverse order: 
Pinochet staged a coup, dissolved the institutions of democracy and then im- 
posed shock therapy; Yeltsin imposed shock therapy in a democracy, then 
could defend it only by dissolving democracy and staging a coup. Both sce- 
narios earned enthusiastic support from the West. 

"Yeltsin Receives Widespread Backing for Assault," read a headline in 
The Washington Post the day after the coup, "Victory Seen for Democracy." The 
Boston Globe went with "Russia Escapes a Return to the Dungeon of Its Past." 
The U.S. secretary of state, Warren Christopher, traveled to Moscow to stand 
with Yeltsin and Gaidar and declared, "The United States does not easily sup- 
port the suspension of parliaments. But these are extraordinary times." 48 

The events looked different in Russia. Yeltsin, the man who had risen to 
power by defending the parliament, had now literally set it on fire, leaving it so 
badly charred that it was nicknamed the black house. A middle-age Muscovite 
told a foreign camera crew in horror, "People supported [Yeltsin] because he 
promised us democracy, but he shot up that democracy. Not only did he violate 
it, but he shot it up." 49 Vitaly Neiman, who had stood guard at the entrance of 
the White House during the 1991 coup, put the betrayal this way: "What we 
got was entirely the opposite of what we dreamed of. We went to the barricades 
for them, laid our lives on the line, but they didn't keep their promises." 50 


Jeffrey Sachs, lauded for proving that radical free-market reforms could 
be compatible with democracy, continued to publicly support Yeltsin after 
his assault on the parliament, dismissing his opponents as "a group of former 
communists intoxicated by power." 51 In his book The End of Poverty, in 
which he gives his definitive account of his involvement in Russia, Sachs 
completely glosses over this dramatic episode, not mentioning it once, just 
as he left out the state of siege and attacks on labor leaders that accompanied 
his shock program in Bolivia. 52 

Following the coup, Russia was under unchecked dictatorial rule: its elected 
bodies were dissolved, the Constitutional Court was suspended, as was the 
constitution; tanks patrolled the streets, a curfew was in effect, and the press 
faced pervasive censorship, though civil liberties were soon restored. 

So what did the Chicago Boys and their Western advisers do at this critical 
moment? The same thing they did when Santiago smoldered, and the same 
thing they would do when Baghdad burned: liberated from the meddling of 
democracy, they went on a law-making binge. Three days after the coup, 
Sachs observed that up to this point "there was no shock therapy" because 
the plan was "only incoherently and fitfully put into practice. Now there is a 
chance to do something," he said. 53 

And do something they did. "These days, Yeltsin's liberal economic team 
is on a roll," reported Newsweek. "The day after the Russian president dis- 
solved Parliament, the word came down to the market reformers: start writ- 
ing decrees." The magazine quoted a "jubilant Western economist working 
closely with the government" who made it absolutely clear that in Russia, 
democracy was always a hindrance to the market plan: "With Parliament out 
of the way, this is a great time for reform. . . . The economists around here 
were pretty depressed. Now we're working day and night." Indeed, there seems 
to be nothing quite as cheering as a coup, as Charles Blitzer, the World 
Bank's chief economist for Russia, told The Wall Street Journal. "I've never 
had so much fun in my life." 54 

The fun was just beginning. With the country reeling from the attack, 
Yeltsin's own Chicago Boys rammed through the most contentious measures 
in their program: huge budget cuts, the removal of price controls on basic 
food items, including bread, and even more and faster privatizations— the 
standard policies that cause so much instant misery that they seem to require 
a police state to stave off rebellion. 


After Yeltsin s coup, Stanley Fischer, first deputy managing director of the 
IMF (and a 1970s Chicago Boy), advocated "moving as fast as possible on all 
fronts." 55 So did Lawrence Summers, who was helping to shape Russia pol- 
icy in the Clinton administration. The "three '-ations,' " as he called them — 
"privatization, stabilization and liberalization— must all be completed as 
soon as possible." 56 

Change was so rapid that it was impossible for Russians to keep up. Work- 
ers often did not even know that their factories and mines had been sold— let 
alone how they had been sold or to whom (a profound confusion I would 
witness a decade later in the state-owned factories of Iraq). In theory, all this 
wheeling and dealing was supposed to create the economic boom that 
would lift Russia out of desperation; in practice, the Communist state was 
simply replaced with a corporatist one: the beneficiaries of the boom were 
confined to a small club of Russians, many of them former Communist 
Party apparatchiks, and a handful of Western mutual fund managers who 
made dizzying returns investing in newly privatized Russian companies. A 
clique of nouveaux billionaires, many of whom were to become part of the 
group universally known as "the oligarchs" for their imperial levels of wealth 
and power, teamed up with Yeltsin's Chicago Boys and stripped the country 
of nearly everything of value, moving the enormous profits offshore at a rate 
of $2 billion a month. Before shock therapy, Russia had no millionaires; by 
2003, the number of Russian billionaires had risen to seventeen, according 
to the Forbes list. 57 

That is partly because, in a rare departure from Chicago School ortho- 
doxy, Yeltsin and his team did not allow foreign multinationals to buy up 
Russia's assets directly; they kept the prizes for Russians, then opened up the 
newly privatized companies, owned by so-called oligarchs, to foreign share- 
holders. The returns were still astronomical. "Looking for an investment that 
could gain 2,000 per cent in three years?" The Wall Street Journal asked. 
"Only one stock market offers that hope . . . Russia." 58 Many investment 
banks, including Credit Suisse First Boston, as well as a few deep-pocketed 
financiers, quickly set up dedicated Russian mutual funds. 

For the country's oligarchs and foreign investors, only one cloud loomed on 
the horizon: Yeltsin's plummeting popularity. The effects of the economic 
program were so brutal for the average Russian, and the process was so self- 
evidently corrupt, that his approval ratings fell to the single digits. If Yeltsin 


was pushed from office, whoever replaced him would likely put a halt to 
Russia's adventure in extreme capitalism. Even more worrying for the oli- 
garchs and the "reformers," there would be a strong case for renationalizing 
many of the assets that had been handed out under such unconstitutional 
political circumstances. 

In December 1994, Yeltsin did what so many desperate leaders have done 
throughout history to hold on to power: he started a war. His national secu- 
rity chief, Oleg Lobov, had confided to a legislator, "We need a small, victo- 
rious war to raise the president's ratings," and the defense minister predicted 
that his army could defeat the forces in the breakaway republic of Chechnya 
in a matter of hours— a cakewalk. 59 

For a while at least, the plan seemed to work. In its first phase, the 
Chechen independence movement was partially suppressed, and Russian 
troops took over the already abandoned presidential palace in Grozny, al- 
lowing Yeltsin to declare glorious victory. It would prove to be a short-term 
triumph, both in Chechnya and in Moscow. When Yeltsin faced reelection 
in 1996, he was still so unpopular and his defeat looked so certain that his 
advisers toyed with canceling the vote altogether; a letter signed by a group 
of Russian bankers published in all the Russian national newspapers strongly 
hinted at this possibility. 60 Yeltsin's privatization minister, Anatoly Chubais 
(whom Sachs once described as "a freedom fighter"), became one of the 
most outspoken proponents of the Pinochet option. 61 "In order to have a 
democracy in society there must be a dictatorship in power," he pronounced. 62 
It was a direct echo of both the excuses made for Pinochet by Chile's 
Chicago Boys and Deng Xiaoping's philosophy of Friedmanism without the 

In the end, the election went ahead and Yeltsin won, thanks to an esti- 
mated $100 million in financing from oligarchs (thirty-three times the legal 
amount) as well as eight hundred times more coverage on oligarch- 
controlled TV stations than his rivals. 63 With the threat of a sudden change 
in government removed, the knockoff Chicago Boys were able to move to 
the most contentious, and most lucrative, part of their program: selling off 
what Lenin had once called "the commanding heights." 

Forty percent of an oil company comparable in size to France's Total was 
sold for $88 million (Total's sales in 2006 were $193 billion). Norilsk 
Nickel, which produced a fifth of the world's nickel, was sold for $170 
million — even though its profits alone soon reached $1.5 billion annually. 
The massive oil company Yukos, which controls more oil than Kuwait, was 


sold for $309 million; it now earns more than $3 billion in revenue a year. 
Fifty-one percent of the oil giant Sidanko went for $130 million; just two 
years later that stake would be valued on the international market at $2.8 
billion. A huge weapons factory sold for $3 million, the price of a vacation 
home in Aspen. 64 

The scandal wasn't just that Russia's public riches were auctioned off 
for a fraction of their worth — it was also that, in true corporatist style, they 
were purchased with public money. As the Moscow Times journalists Matt 
Bivens and Jonas Bernstein put it, "a few hand-picked men took over Rus- 
sia's state-developed oil fields for free, as part of a giant shell game in which 
one arm of government paid another arm." In a bold act of cooperation be- 
tween the politicians selling the public companies and the businessmen 
buying them, several of Yeltsin's ministers transferred large sums of public 
money, which should have gone into the national bank or treasury, into 
private banks that had been hastily incorporated by oligarchs.* The state 
then contracted with the same banks to run the privatization auctions for 
the oil fields and mines. The banks ran the auctions, but they also bid in 
them — and sure enough, the oligarch-owned banks decided to make them- 
selves the proud new owners of the previously public assets. The money 
that they put up to buy the shares in these public companies was likely the 
same public money that Yeltsin's ministers had deposited with them ear- 
lier. 65 In other words, the Russian people fronted the money for the looting 
of their own country. 

As one of Russia's "young reformers" put it, when Russia's Communists 
decided to break up the Soviet Union, they made an "exchange [of] power 
for property." 66 Just like his mentor Pinochet's, Yeltsin's own family grew ex- 
ceedingly rich, his children and several of their spouses appointed to top 
posts at large privatized firms. 

With oligarchs firmly in control of the key assets of the Russian state, they 
opened up their new companies to blue-chip multinationals, who snapped 
up large portions. In 1997, Royal Dutch/Shell and BP entered into partner- 
ships with two key Russian oil giants, Gazprom and Sidanko. 67 These were 
highly profitable investments, but the principal share of the wealth in Russia 
was in the hands of Russian players, not their foreign partners. It is an over- 
sight that the IMF and the U.S. Treasury would successfully rectify in future 

* The two major oligarch-connected banks were Mikhail Khodorkovsky s Bank Menatep and 
Vladimir Potanin's Uneximbank. 


privatization auctions in Bolivia and Argentina. And in Iraq after the inva- 
sion, the U.S. would go even further, attempting to cut the local elite out of 
lucrative privatization deals entirely. 

Wayne Merry, the chief political analyst at the U.S. embassy in Moscow 
during the key years of 1990 to 1994, has admitted that the choice between 
democracy and market interests in Russia was a stark one. "The U.S. govern- 
ment chose the economic over the political. We chose the freeing of prices, 
privatization of industry, and the creation of a really unfettered, unregulated 
capitalism, and essentially hoped that rule of law, civil society, and represen- 
tative democracy would develop somehow automatically as a result of 
that. . . . Unfortunately, the choice was to ignore popular will and to press on 
with the policy." 68 

So much wealth was being made in Russia in this period that some of the 
"reformers" couldn't resist getting in on the action. Indeed, more than any- 
where else up to this point, the situation in Russia exposed the myth of the 
technocrat, the egghead free-market economist supposedly imposing text- 
book models out of pure conviction. As in Chile and China, where rampant 
corruption and economic shock therapy went hand in hand, several of 
Yeltsin's Chicago School ministers and deputy ministers ended up losing 
their posts in high-profile corruption scandals. 69 

Then there were the whiz kids from Harvard's Russia Project, tasked with 
organizing the country's privatizations and the mutual fund market. The two 
academics who headed the project — Harvard economics professor Andrei 
Shleifer and his deputy Jonathan Hay— were discovered to have been di- 
rectly profiting from the market they were busily creating. While Shleifer 
was the lead adviser to the Gaidar team on privatization policy, his wife was 
investing heavily in privatized Russian assets. Hay, a thirty-year-old graduate 
of Harvard Law School, also made personal investments in privatized Rus- 
sian oil stocks, allegedly in direct violation of Harvard's USAID contract. 
And while Hay was helping the Russian government to set up a new mutual 
fund market, his girlfriend, later wife, was awarded the first license to open a 
mutual fund company in Russia, which, when it started, was managed out of 
the U.S. government-funded Harvard office. (Technically, as head of the 
Harvard Institute for International Development, which housed the Russia 
Project, Sachs was Shleifer 's and Hay's boss for part of this time. However, 
Sachs was no longer working on the ground in Russia and has never been 
implicated in any of the questionable actions.) 70 


When these tangles came to light, the U.S. Department of Justice sued 
Harvard, alleging that the business dealings of Shleifer and Hay violated 
contracts they had signed agreeing not to profit personally from their high- 
level work. After a seven-year investigation and legal battle, the U.S. District 
Court in Boston found that Harvard had breached its contract, that the two 
academics "conspired to defraud the United States," that "Shleifer engaged 
in apparent self-dealing," that "Hay attempted to launder $400,000 through 
his father and girlfriend " 71 Harvard paid a settlement of $26.5 million, the 
largest in the institution's history. Shleifer agreed to pay $2 million, and Hay 
agreed to pay between $1 and $2 million, depending on his earnings, 
though neither admitted any liability.* 72 

Perhaps this kind of "self-dealing" was inevitable, given the nature of the 
Russian experiment. Anders Aslund, one of the most influential Western 
economists working in Russia at the time, claimed that shock therapy would 
work because "the miraculous incentives or temptations of capitalism con- 
quer more or less anything." 75 So if greed was to be the engine for rebuilding 
Russia, then surely the Harvard men and their wives and girlfriends, as well 
as Yeltsin's staff and family, by taking part in the frenzy themselves, were sim- 
ply leading by example. 

This points to a nagging and important question about free-market ideo- 
logues: Are they "true believers," driven by ideology and faith that free mar- 
kets will cure underdevelopment, as is often asserted, or do the ideas and 
theories frequently serve as an elaborate rationale to allow people to act on 
unfettered greed while still invoking an altruistic motive? All ideologies are 
corruptible, of course (as Russia's apparatchiks made abundantly clear when, 
during the Communist era, they collected their abundant privileges), and 
there are certainly honest neoliberals. But Chicago School economics does 
seem particularly conducive to corruption. Once you accept that profit and 
greed as practiced on a mass scale create the greatest possible benefits for any 
society, pretty much any act of personal enrichment can be justified as a con- 
tribution to the great creative cauldron of capitalism, generating wealth and 
spurring economic growth— even if it's only for yourself and your colleagues. 

George Soros's philanthropic work in Eastern Europe— including his fund- 
ing of Sachs's travels through the region— has not been immune to controversy. 

* Unfortunately, the money didn't go to the Russian people, the true victims of the corrupt 
privatization process, but back to the U.S. government— the same way that the "whistle- 
blower" lawsuits against U.S. contractors in Iraq diwy up the settlement between the U.S. 
government and the American whistle-blower. 


There is no doubt that Soros was committed to the cause of democratization 
in the Eastern Bloc, but he also had clear economic interests in the kind of 
economic reform accompanying that democratization. As the world's most 
powerful currency trader, he stood to benefit greatly when countries imple- 
mented convertible currencies and lifted capital controls, and when state com- 
panies were put on the auction block, he was one of the potential buyers. 

It would have been perfectly legal for Soros to profit directly from the 
markets he— as a philanthropist— was helping to open up, but it would not 
have looked particularly good. For a time, he dealt with the appearance of 
conflict of interest by barring his companies from investing in countries 
where his foundations were active. But by the time Russia went up for sale, 
Soros could no longer resist. In 1994, he explained that his policy "has been 
modified due to the fact that markets are really developing in the region and 
I have no rhyme or reason or right to deny my funds, or my shareholders, the 
possibility of investing there, or to deny those countries the chance to get 
hold of some of these funds." Soros had already purchased shares in Russia's 
privatized phone system in 1994, for example (a very bad investment, as it 
turned out), and acquired a piece of a large food company in Poland. 74 In 
the early days of the fall of Communism, Soros, through Sachs's work, had 
been one of the prime movers behind the push for the shock approach to 
economic transformation. By the late nineties, however, he had an apparent 
change of heart, becoming one of the leading critics of shock therapy and di- 
recting his foundations to fund NGOs that focus on putting anticorruption 
measures in place before privatizations occur. 

That epiphany came much too late to save Russia from casino capitalism. 
Shock therapy had cracked it open to flows of hot money— short-term specu- 
lative investment and currency trading, which are highly profitable. Such in- 
tense speculation meant that in 1998, when the Asian financial crisis (the 
subject of chapter 13) started spreading, Russia was left wholly unprotected. 
Its already precarious economy crashed definitively. The public blamed 
Yeltsin, and his approval rating dropped to an utterly untenable 6 percent. 75 
With the futures of many of the oligarchs in jeopardy once again, it was going 
to take yet another major shock to save the economic project and stave off the 
threat of genuine democracy coming to Russia. 

In September 1999, the country was hit with a series of exceedingly cruel 
terrorist attacks: seemingly out of the blue, four apartment buildings were 
blown up in the middle of the night, killing close to three hundred people. 


In a narrative all too familiar to Americans after September 11, 2001, every 
other issue was blasted off the political map by the only force on earth capa- 
ble of doing the job. "It was this sort of very simple fear," explains the Rus- 
sian journalist Yevgenia Albats. "All of a sudden, it appeared that all these 
discussions about democracy, oligarchs — nothing compared to this fear to 
die inside your own apartment." 76 

The man put in charge of hunting down the "animals" was Russia's prime 
minister, the steely and vaguely sinister Vladimir Putin.* 77 Immediately after 
the apartment bombings, in late September 1999, Putin launched air strikes 
on Chechnya, attacking civilian areas. In the new light of terror, the fact that 
Putin was a seventeen-year veteran of the KGB — the most feared symbol of 
the Communist era— suddenly seemed reassuring to many Russians. With 
Yeltsin's alcoholism making him increasingly dysfunctional, Putin the pro- 
tector was perfectly positioned to succeed him as president. On December 
31, 1999, with the war in Chechnya foreclosing serious debate, several oli- 
garchs engineered a quiet handover from Yeltsin to Putin, no elections nec- 
essary. Before he left power, Yeltsin took one last page out of the Pinochet 
playbook and demanded legal immunity for himself. Putin's first act as pres- 
ident was signing a law protecting Yeltsin from any criminal prosecution, 
whether for corruption or for the military's killing of pro-democracy demon- 
strators that took place on his watch. 

Yeltsin is regarded by history more as a corrupt buffoon than a menacing 
strongman. Yet his economic policies, and the wars he waged in order to pro- 
tect them, contributed significantly to the Chicago School crusade death 
toll, which has been mounting steadily since Chile in the seventies. In addi- 
tion to the casualties of Yeltsin's October coup, the wars in Chechnya have 
killed an estimated 100,000 civilians. 78 The larger massacres he precipitated 
have taken place in slow motion, but their numbers are much higher— the 
"collateral damage" of economic shock therapy. 

In the absence of major famine, plague or battle, never have so many lost 
so much in so short a time. By 1998, more than 80 percent of Russian farms 
had gone bankrupt, and roughly seventy thousand state factories had closed, 
creating an epidemic of unemployment. In 1989, before shock therapy, 2 

* Not surprisingly, given the defiant criminality of Russia's ruling class, conspiracy theories 
swirl around these events. Many Russians believe that Chechens had nothing to do with the 
apartment bombings and that they were a covert operation designed to turn Putin into 
Yeltsin's heir apparent. 


million people in the Russian Federation were living in poverty, on less than 
$4 a day. By the time the shock therapists had administered their "bitter med- 
icine" in the mid-nineties, 74 million Russians were living below the poverty 
line, according to the World Bank. That means that Russia's "economic re- 
forms" can claim credit for the impoverishment of 72 million people in only 
eight years. By 1996, 25 percent of Russians — almost 37 million people — 
lived in poverty described as "desperate." 79 

Although millions of Russians have been pulled out of poverty in recent 
years, thanks largely to soaring oil and gas prices, Russia's underclass of ex- 
treme poor has remained permanent— with all the sicknesses associated with 
that discarded status. As miserable as life under Communism was, with 
crowded, cold apartments, Russians at least were housed; in 2006 the gov- 
ernment admitted that there were 715,000 homeless kids in Russia, and 
UNICEF has put the number as high as 3.5 million children. 80 

During the Cold War, widespread alcoholism was always seen in the 
West as evidence that life under Communism was so dismal that Russians 
needed large quantities of vodka to get through the day. Under capitalism, 
however, Russians drink more than twice as much alcohol as they used to — 
and they are reaching for harder painkillers as well. Russia's drug czar, Alek- 
sandr Mikhailov, says that the number of users went up 900 percent from 
1994 to 2004, to more than 4 million people, many of them heroin addicts. 
The drug epidemic has contributed to another silent killer: in 1995, fifty 
thousand Russians were HIV positive, and in only two years that number 
doubled; ten years later, according to UNAIDS, nearly a million Russians 
were HIV positive. 81 

These are the slow deaths, but there are fast ones as well. As soon as shock 
therapy was introduced in 1992, Russia's already high suicide rate began to 
rise; 1994, the peak of Yeltsin's "reforms," saw the suicide rate climb to al- 
most double what it had been eight years earlier. Russians also killed each 
other with much greater frequency: by 1994, violent crime had increased 
more than fourfold. 82 

"What have our motherland and her people gotten out of the last 1 5 crim- 
inal years?" Vladimir Gusev, a Moscow academic, asked at a 2006 democ- 
racy demonstration. "The years of criminal capitalism have killed off 10 
percent of our population." Russia's population is indeed in dramatic 
decline— the country is losing roughly 700,000 people a year. Between 
1992, the first full year of shock therapy, and 2006, Russia's population shrank 
by 6.6 million. 83 Three decades ago, Andre Gunder Frank, the dissident 


Chicago economist, wrote a letter to Milton Friedman accusing him of 
"economic genocide." Many Russians describe the slow disappearance of 
their fellow citizens in similar terms today. 

This planned misery is made all the more grotesque because the wealth 
accumulated by the elite is flaunted in Moscow as nowhere else outside of a 
handful of oil emirates. In Russia today, wealth is so stratified that the rich 
and the poor seem to be living not only in different countries but in different 
centuries. One time zone is downtown Moscow, transformed in fast-forward 
into a futuristic twenty-first-century sin city, where oligarchs race around in 
black Mercedes convoys, guarded by top-of-the-line mercenary soldiers, and 
where Western money managers are seduced by the open investment rules 
by day and by on-the-house prostitutes by night. In the other time zone, a 
seventeen-year-old provincial girl, asked about her hopes for the future, 
replied, "It's difficult to talk about the twenty-first century when you're sit- 
ting here reading by candlelight. The twenty-first century does not matter. 
It's the nineteenth century here." 84 

This pillage of a country with as much wealth as Russia required extreme 
acts of terror— from the torching of the parliament to the invasion of Chech- 
nya. "Policy that breeds poverty and crime," writes Georgi Arbatov, one of 
Yeltsin's original (and ignored) economic advisers, ". . . can survive only if 
democracy is suppressed." 85 Just as it had been in the Southern Cone, in Bo- 
livia under the state of siege, in China during Tiananmen. Just as it would 
be in Iraq. 

When in Doubt, Blame Corruption 

Rereading Western news reports on Russia's shock therapy period, it is strik- 
ing how closely discussions at that time paralleled debates about Iraq that 
would unfold more than a decade later. For both the Clinton and Bush Sr. 
administrations, not to mention the European Union, the G7 and the IMF, 
the clear goal in Russia was to erase the preexisting state and create the con- 
ditions for a capitalist feeding frenzy, which in turn would kick-start a boom- 
ing free-market democracy— managed by overconfident Americans barely 
out of school. In other words, it was Iraq without the explosives. 

When the zeal for shock therapy in Russia was at its peak, its cheerleaders 
were absolutely convinced that only total destruction of every single institu- 
tion would create the conditions for a national rebirth— the dream of the 
blank slate that would recur in Baghdad. It is "desirable," wrote the Harvard 


historian Richard Pipes, "for Russia to keep on disintegrating until nothing 
remains of its institutional structures." 86 And the Columbia University 
economist Richard Ericson wrote in 1995, "Any reform must be disruptive 
on a historically unprecedented scale. An entire world must be discarded, 
including all of its economic and most of its social and political institu- 
tions, and concluding with the physical structure of production, capital, 
and technology." 87 

Another Iraq parallel: no matter how baldly Yeltsin defied anything re- 
sembling democracy, his rule was still characterized in the West as part of "a 
transition to democracy," a narrative that would change only when Putin 
began cracking down on the illegal activities of several of the oligarchs. Sim- 
ilarly, the Bush administration has always portrayed Iraq as on the road to 
freedom, even in the face of overwhelming evidence of rampant torture, out- 
of-control death squads and pervasive press censorship. Russia's economic 
program was always described as "reform," just as Iraq is perennially under 
"reconstruction," even after the U.S. contractors have mostly all fled, leaving 
the infrastructure in a shambles, as the destruction roars on. In Russia in the 
mid-nineties, anyone who dared question the wisdom of "the reformers" was 
dismissed as nostalgic for Stalin, just as critics of Iraq's occupation were, for 
years, met with accusations that they thought life was better under Saddam 

When it was no longer possible to hide the failures of Russia's shock ther- 
apy program, the spin turned to Russia's "culture of corruption," as well as 
speculation that Russians "aren't ready" for genuine democracy because of 
their long history of authoritarianism. Washington's think-tank economists 
hastily disavowed the Frankenstein economy they helped create in Russia, 
deriding it as "mafia capitalism"— supposedly a phenomenon peculiar to the 
Russian character. "Nothing good will ever come of Russia," The Atlantic 
Monthly reported in 2001, quoting a Russian office worker. In the Los Ange- 
les Times, the journalist and novelist Richard Lourie pronounced that "the 
Russians are such a calamitous nation that even when they undertake some- 
thing sane and banal, like voting and making money, they make a total hash 
of it." 88 The economist Anders Aslund had claimed that the "temptations of 
capitalism" alone would transform Russia, that the sheer power of greed 
would provide the momentum to rebuild the country. Asked a few years later 
what went wrong, he replied, "Corruption, corruption and corruption," as if 
corruption was something other than the unrestrained expression of the 
"temptations of capitalism" that he had so enthusiastically praised. 89 


The entire charade would be replayed a decade later to explain away the 
billions of missing reconstruction dollars in Iraq, with the disfiguring legacy 
of Saddam and the pathologies of "radical Islam" standing in for the legacy 
of Communism and czarism. In Iraq, U.S. rage at the apparent inability of 
Iraqis to accept their gift of gunpoint "freedom" would also turn abusive — 
except that in Iraq the rage would not be found only in nasty editorials about 
"ungrateful" Iraqis but would also be pounded out on the bodies of Iraqi 
civilians by U.S. and British soldiers. 

The real problem with the blame-Russia narrative is that it pre-empts any 
serious examination of what the whole episode has to teach about the true 
face of the crusade for unfettered free markets, the most powerful political 
trend of the past three decades. The corruption of many of the oligarchs is 
still spoken of as an alien force that infected otherwise worthy free-market 
plans. But corruption wasn't an intruder to Russia's free-market reforms: 
quick and dirty deals were actively encouraged by Western powers at every 
stage as the fastest way to kick-start the economy. National salvation through 
the harnessing of greed was the closest thing Russia's Chicago Boys and their 
advisers had to a plan for what they were going to do after they finished de- 
stroying Russia's institutions. 

Nor were these catastrophic results unique to Russia; the entire thirty- 
year history of the Chicago School experiment has been one of mass cor- 
ruption and corporatist collusion between security states and large 
corporations, from Chile's piranhas, to Argentina's crony privatizations, to 
Russia's oligarchs, to Enron's energy shell game, to Iraq's "free fraud zone." 
The point of shock therapy is to open up a window for enormous profits to 
be made very quickly— not despite the lawlessness but precisely because of 
it. "Russia Has Become a Klondike for International Fund Speculators," ran 
a headline in a Russian newspaper in 1997, while Forbes described Russia 
and Central Europe as "the new frontier." 90 The colonial-era terms were en- 
tirely appropriate. 

The movement that Milton Friedman launched in the 1950s is best under- 
stood as an attempt by multinational capital to recapture the highly prof- 
itable, lawless frontier that Adam Smith, the intellectual forefather of today's 
neoliberals, so admired— but with a twist. Rather than journeying through 
Smith's "savage and barbarous nations" where there was no Western law (no 
longer a practical option), this movement set out to systematically dismantle 
existing laws and regulations to re-create that earlier lawlessness. And where 


Smith's colonists earned their record profits by seizing what he described as 
"waste lands" for "but a trifle," today's multinationals see government pro- 
grams, public assets and everything that is not for sale as terrain to be con- 
quered and seized — the post office, national parks, schools, social security, 
disaster relief and anything else that is publicly administered. 91 

Under Chicago School economics, the state acts as the colonial frontier, 
which corporate conquistadors pillage with the same ruthless determination 
and energy as their predecessors showed when they hauled home the gold and 
silver of the Andes. Where Smith saw fertile green fields turned into profitable 
farmlands on the pampas and the prairies, Wall Street saw "green field oppor- 
tunities" in Chile's phone system, Argentina's airline, Russia's oil fields, Bo- 
livia's water system, the United States' public airwaves, Poland's factories— all 
built with public wealth, then sold for a trifle. 92 Then there are the treasures 
created by enlisting the state to put a patent and a price tag on life-forms and 
natural resources never dreamed of as commodities— seeds, genes, carbon in 
the earth's atmosphere. By relentlessly searching for new profit frontiers in the 
public domain, Chicago School economists are like the mapmakers of the 
colonial era, identifying new waterways through the Amazon, marking off the 
location of a hidden cache of gold inside an Inca temple. 

Corruption has been as much a fixture on these contemporary frontiers 
as it was during the colonial gold rushes. Since the most significant privati- 
zation deals are always signed amid the tumult of an economic or political 
crisis, clear laws and effective regulators are never in place — the atmos- 
phere is chaotic, the prices are flexible and so are the politicians. What we 
have been living for three decades is frontier capitalism, with the frontier 
constantly shifting location from crisis to crisis, moving on as soon as the 
law catches up. 

And so, far from acting as a cautionary tale, the rise of Russia's billionaire 
oligarchs proved precisely how profitable the strip mining of an industrialized 
state could be —and Wall Street wanted more. Immediately following the So- 
viet collapse, the U.S. Treasury and the IMF became much tougher in their 
demands for instant privatizations from other crisis-racked countries. The 
most dramatic case to date came in 1994, the year after Yeltsin's coup, when 
Mexico's economy suffered a major meltdown known as the Tequila Crisis: 
the terms of the U.S. bailout demanded rapid-fire privatizations, and Forbes 
announced that the process had minted twenty-three new billionaires. "The 
lesson here is fairly obvious: to predict whence the next bursts of billionaires 


will issue, look for countries where markets are opening." It also cracked 
Mexico open to unprecedented foreign ownership: in 1990, only one of Mex- 
ico's banks was foreign owned, but "by 2000 twenty-four out of thirty were in 
foreign hands." 93 Clearly the only lesson learned from Russia is that the faster 
and more lawless the transfer of wealth, the more profitable it will be. 

One person who understood that was Gonzalo Sanchez de Lozada 
(Goni), the businessman in whose living room the Bolivian shock therapy 
plan had been drafted in 1985. As president of the country in the mid- 
nineties, he sold off Bolivia's national oil company, as well as the national air- 
line, railway, electricity and phone companies. Unlike what transpired in 
Russia, where the biggest prizes were awarded to locals, the winners of Bo- 
livia's fire sale included Enron, Royal Dutch/Shell, Amoco Corp. and 
Citicorp— and the sales were direct; there was no need to partner with local 
firms. 94 The Wall Street Journal described the Wild West scene in La Paz in 
1995: "The Radisson Plaza Hotel is crammed with executives from major 
U.S. companies like AMR Corp.'s American Airlines, MCI Communications 
Corp., Exxon Corp. and Salomon Brothers Inc. They have been invited by 
the Bolivians to rewrite laws governing the sectors to be privatized and to bid 
on the companies on the block" — a tidy arrangement. "The important thing 
is to make these changes irreversible and to get them done before the anti- 
bodies kick in," said President Sanchez de Lozada, explaining his shock ther- 
apy approach. To make absolutely sure those "antibodies" didn't kick in, 
Bolivia's government did something it had done before under similar circum- 
stances: it imposed yet another prolonged "state of siege" that banned politi- 
cal gatherings and authorized the arrest of all opponents of the process. 95 

These were also the years of Argentina's notoriously corrupt privatization 
circus, hailed as "A Bravo New World" in an investment report by Goldman 
Sachs. Carlos Menem, the Peronist president who came to power promising 
to be the voice of the working man, was in charge during those years, down- 
sizing and then selling the oil fields, the phone system, the airline, the trains, 
the airport, the highways, the water system, the banks, the Buenos Aires zoo 
and, eventually, the post office and the national pension plan. As the coun- 
try's wealth moved offshore, the lifestyles of Argentina's politicians grew in- 
creasingly lavish. Menem, once known for his leather jackets and 
working-class sideburns, began wearing Italian suits and reportedly making 
trips to the plastic surgeon ("a bee sting" is how he explained his swollen fea- 
tures). Maria Julia Alsogaray, Menem's minister in charge of privatization, 


posecl for the cover of a popular magazine wearing nothing but an artfully 
draped fur coat, while Menem began driving a bright red Ferrari Testarossa— 
a "gift" from a grateful businessman. 96 

The countries that emulated Russia's privatizations also experienced 
milder versions of Yeltsins coups-in-reverse— governments that came to 
power peacefully and, through elections, found themselves resorting to in- 
creasing levels of brutality to hold on to power and defend their reforms. In 
Argentina, the rule of unfettered neoliberalism ended on December 19, 
2001, when President Fernando de la Rua and his finance minister, Domingo 
Cavallo, tried to impose further IMF-prescribed austerity measures. The pop- 
ulation revolted, and de la Rua sent in federal police on orders to disperse the 
crowds by whatever means were required. De la Rua was forced to flee in a 
helicopter, but not before twenty-one protesters were killed by police and 
1,350 people were injured. 97 Goni's last months and days in office were even 
bloodier. His privatizations sparked a series of "wars" in Bolivia: first the water 
war, against Bechtels water contract that sent prices soaring 300 percent; then 
a "tax war" against an IMF-prescribed plan to make up a budget shortfall by 
taxing the working poor; then the "gas wars" against his plans to export gas to 
the U.S. In the end, Goni was also forced to flee the presidential palace to live 
in exile in the U.S., but, as in de la Rua's case, not before many lives were lost. 
After Goni ordered the military to put down street demonstrations, soldiers 
killed close to seventy people — many of them bystanders— and injured four 
hundred others. As of early 2007, Goni was wanted by Bolivia's Supreme 
Court on charges relating to the massacre. 98 

The regimes that imposed mass privatization on Argentina and Bolivia 
were both held up in Washington as examples of how shock therapy could 
be imposed peacefully and democratically, without coups or repression. Al- 
though it's true that they did not begin in a hail of gunfire, it is surely signifi- 
cant that both ended in one. 

In much of the Southern Hemisphere, neoliberalism is frequently spoken of 
as "the second colonial pillage": in the first pillage, the riches were seized 
from the land, and in the second they were stripped from the state. After 
every one of these profit frenzies come the promises: next time, there will be 
firm laws in place before a country's assets are sold off, and the entire process 
will be watched over by eagle-eyed regulators and investigators with unim- 
peachable ethics. Next time there will be "institution building" before priva- 
tizations (to use the post-Russia parlance). But calling for law and order after 


the profits have all been moved offshore is really just a way of legalizing the 
theft ex post facto, much as the European colonizers locked in their land 
grabs with treaties. Lawlessness on the frontier, as Adam Smith understood, 
is not the problem but the point, as much a part of the game as the contrite 
hand-wringing and the pledges to do better next time. 




You have made yourself the trustee for those in every country who 
seek to mend the evils of our condition by reasoned experiment 
within the framework of the existing social system. If you fail, ra- 
tional change will be gravely prejudiced throughout the world, 
leaving orthodoxy and revolution to fight it out. 
—John Maynard Keynes in a letter to 
President Franklin D. Roosevelt, 1933 1 

On the day I went to visit Jeffrey Sachs in October 2006, New York City was 
under a damp blanket of gray drizzle punctuated, every five paces or so, by a 
vibrant burst of red. It was the week of the grand launch of Bono's (Product) 
Red brand, and the city was getting the full blitz. Red iPods and Armani 
sunglasses loomed from billboards overhead, every bus shelter featured 
Steven Spielberg or Penelope Cruz in a different red garment, every Gap 
outlet in the city had given itself over to the launch, and the Apple store on 
Fifth Avenue was emitting a rosy glow. "Can a tank top change the world?" 
asked one ad. Yes it can, we were assured, because a portion of the profits 
was going to the Global Fund to Fight AIDS, TB and malaria. "Shop till it 
stops!" Bono had pronounced, in the midst of a televised shopping spree 
with Oprah a couple of days earlier. 2 

I had a hunch that most of the journalists wanting to talk to Sachs that 
week would be looking for the superstar economist's view on this fashionable 
new way to raise aid money. After all, Bono refers to Sachs as "my professor," 
and a photo of the two men greeted me as I entered Sachs's office at Columbia 


University (he left Harvard in 2002). In the midst of all this glamorous char- 
ity, I felt like a bit of a spoiler, because I wanted to talk about the professor's 
least favorite topic of all, one that has prompted him to threaten to hang up 
on reporters mid-interview. I wanted to talk about Russia and what went 
wrong there. 

It was in Russia, after the first year of shock therapy, that Sachs began his 
own transition, from global shock doctor to one of the world s most outspo- 
ken campaigners for increasing aid to impoverished countries. It is a transi- 
tion that, in the years since, has put him in conflict with many former 
colleagues and collaborators in orthodox economic circles. As far as Sachs is 
concerned, he isn't the one who changed— he was always committed to 
helping countries develop market-based economies bolstered by generous 
aid and debt forgiveness. For years he had found it possible to achieve these 
goals by working in partnership with the IMF and the U.S. Treasury. But by 
the time he was on the ground in Russia, the tenor of discussion had 
changed and he came up against a level of official indifference that shocked 
him and pushed him into a more confrontational stance with Washington's 
economic establishment. 

Seen with hindsight, there is no doubt that Russia marked the beginning of 
a new chapter in the evolution of the Chicago School crusade. In earlier 
shock therapy laboratories of the seventies and eighties, there had been some 
desire at the U.S. Treasury and the IMF to make the experiments at least su- 
perficially successful— precisely because they were experiments, meant to 
serve as models for other countries to follow. The Latin American dictator- 
ships of the seventies were rewarded for their attacks on trade unions and their 
open borders with steady loans, which were granted despite such departures 
from Chicago School orthodoxy as Chile's continued state control over the 
world's largest copper mines and the Argentine junta's slow action on privati- 
zations. Bolivia, as the first democracy to adopt shock therapy in the eighties, 
was granted aid and had a portion of its debt erased— well before Goni 
moved ahead with privatization in the nineties. In Poland, the first Eastern 
Bloc country to impose shock therapy, Sachs had no trouble securing sub- 
stantial loans, and, once again, major privatizations were slowed and stag- 
gered when the original plan encountered strong opposition. 

Russia was different. "Too much shock, not enough therapy" was the 
widespread verdict. Western powers were totally unyielding in their demand 
for the most painful "reforms " at the same time as they were assiduously 
stingy in the amount of aid they would offer in return. Even Pinochet had 


cushioned the pain of shock therapy with food programs for the poorest chil- 
dren; Washington lenders saw no reason to help Yeltsin do the same, push- 
ing the country instead into its Hobbesian nightmare. 

Having a substantive discussion about Russia with Sachs isn't easy. I was 
hoping to take the conversation beyond his initial defensiveness ("I was right 
and they were completely wrong," he told me. Then, "Ask Larry Summers, 
don't ask me; ask Bob Rubin, ask Clinton, ask Cheney how happy they were 
with the way Russia went"), I also wanted to get beyond the genuine despon- 
dency ("I was trying to do something at the time, which proved to be com- 
pletely useless"). What I was aiming to understand better was why he was so 
unsuccessful in Russia, why Jeffrey Sachs's famous luck ran out at that par- 
ticular juncture. 

Sachs now says that he knew something was different as soon as he arrived 
in Moscow. "I had a sense of foreboding from the first moment ... I was fu- 
rious from the first moment." Russia was facing "a first-class macroeconomic 
crisis, one of the most intense and unstable I had ever seen in my life," he 
said. And as far as he was concerned, the way out was clear: the shock ther- 
apy measures he had prescribed for Poland "to get basic market forces work- 
ing quickly— plus a heck of a lot of aid. I was thinking of $30 billion a year, 
roughly divided, $15 billion for Russia and $15 billion for the republics, in 
order to be able to pull off a peaceful and democratic transition." 

Sachs, it must be said, has a notoriously selective memory when it comes 
to the draconian policies he pushed in both Poland and Russia. In our inter- 
view, he repeatedly glossed over his own calls for swift privatization and large 
cutbacks (in short, shock therapy, a phrase he now disavows, claiming he was 
referring only to narrow pricing policies, not wholesale country makeovers). 
The way he remembers his role, shock therapy played a minor part, and he 
was almost exclusively focused on fund-raising; his plan for Poland, he says, 
was a "stabilization fund, debt cancellation, short-term financial help, inte- 
gration with the Western European economy. . . . When I was asked by 
Yeltsin's team to help them, I proposed basically the same thing."* 

There is no debate about the key fact in Sachs's account: securing a major 
aid infusion was a central pillar of his plan for Russia— that was Yeltsin's 

* As John Cassidy noted in a 2005 New Yorker profile, "The fact is that in both PoLand and 
Russia Sachs favored large-scale social engineering over gradual change and institution- 
building. The disastrous privatization policy is one example. Although most of the privatiza- 
tion took place after Sachs left Russia, at the end of 1994, the original policy framework was 
put in place in 1992 and 1993, when he was still there." 


incentive for submitting to the entire program. Sachs based this vision, he 
says, on the Marshall Plan, the $12.6 billion ($130 billion in today's dollars) 
that the U.S. allotted for Europe to reconstruct its infrastructure and industry 
after the Second World War— a scheme widely regarded as Washington's 
most successful diplomatic initiative. 3 Sachs says the Marshall Plan showed 
that "when a country is in disarray, you can't just expect it to get back up on 
its feet in a coherent way by itself. So, for me the interesting thing about the 
Marshall Plan ... is how a modest amount of monetary infusion created a 
base for [Europe's] economic recovery to take hold." At the start, he had been 
convinced that there was a similar political will in Washington to transform 
Russia into a successful capitalist economy, just as there had been a genuine 
commitment to West Germany and Japan after the Second World War. 

Sachs was confident that he could shake a new Marshall Plan out of the 
U.S. Treasury and the IMF, and not without reason. "Probably the most im- 
portant economist in the world" is how The New York Times described him 
in this period. 4 When he was an adviser to Poland's government, he recalled 
that he "raised $1 billion in one day in the White House." But, Sachs told 
me, "when I suggested the same thing for Russia, there was absolutely no in- 
terest at all. None. And the IMF just stared me down like I was crazy." 

Although Yeltsin and his Chicago Boys had plenty of admirers in Wash- 
ington, no one was willing to come up with the kind of aid they were talking 
about. That meant Sachs had urged wrenching policies on Russia, and he 
couldn't keep up his end of the bargain. It was in this period that he came 
close to self-criticism: "My greatest personal mistake/' Sachs said in the midst 
of the Russia debacle, "was to say to President Boris Yeltsin, 'Don't worry; 
help is on the way.' I believed deeply that the assistance was too important, 
and too crucial to the West, for it to be messed up as significantly and funda- 
mentally as it has been."^ But the problem wasn't only that the IMF and the 
Treasury hadn't listened to Sachs, it was that Sachs had pushed hard for 
shock therapy before he had any guarantee that they would—a gamble for 
which millions paid dearly. 

When I revisited the question with Sachs, he reiterated that his real failing 
was in misreading Washington's political mood. He recalled a discussion 
with Lawrence Eagleburger, U.S. secretary of state under George H. W. 
Bush. Sachs made his case: if Russia was allowed to descend further into eco- 
nomic chaos, it could unleash forces no one could control — mass famine, 
resurgent nationalism, even fascism, surely unwise in a country where virtu- 
ally the only product held in surplus was nuclear arms. "Your analysis may 


be just right, but it's not going to happen," Eagleburger replied. Then he 
asked Sachs, "Do you know what year this is?" 

It was 1992, the year of the U.S. election in which Bill Clinton was about 
to defeat Bush Sr. The core of Clinton's campaign was that Bush had neg- 
lected economic hardship at home to pursue glory abroad ("It's the econ- 
omy, stupid"). Sachs believes that Russia was a casualty of that domestic 
battle. And, he says, he now sees that there was something else at work: many 
of Washington's power brokers were still fighting the Cold War. They saw 
Russia's economic collapse as a geopolitical victory, the decisive one that en- 
sured U.S. supremacy. "I had none of that mind-set," Sachs told me, sound- 
ing, as he often does, like a Boy Scout who has stumbled into an episode of 
The Sopranos. "For me it was just, 'Great, this is the final end of this abom- 
inable regime. Now, let's really help [the Russians]. Let's throw everything 
into it. . . .' I'm sure that in retrospect, in the minds of the policy planners, 
that was viewed as crazy." 

Despite his failure, Sachs does not feel that the policy toward Russia in this 
period was driven by free-market ideology. It was mostly, he said, characterized 
by "sheer laziness." He would have welcomed a heated debate about whether 
to offer aid to Russia or leave it all to the market. Instead, there was a collective 
shrug. He said he was amazed by the absence of serious research and debate 
informing momentous decisions. "To me, it was just the lack of effort that was 
the dominant thing. Let's at least spend two days and debate this— well, we 
never even did that! I never saw the hard work of 'Roll up your sleeves, let's get 
down and solve these problems, let's figure out what's really going on.' " 

When Sachs talks passionately about "hard work," he is harking back to 
the days of the New Deal, the Great Society and the Marshall Plan, when 
young men from Ivy League schools sat around commanding tables in their 
shirt sleeves, surrounded by empty coffee cups and piles of policy papers, 
having heated debates about the interest rate and the price of wheat. That is 
how policy makers behaved in the heyday of Keynesianism, and that is the 
kind of "seriousness" that Russia's catastrophe clearly deserved. 

But attributing the abandonment of Russia to a bout of collective laziness 
in Washington offers little by way of explanation. Perhaps a better way to un- 
derstand the episode is through the lens favored by free-market economists: 
competition in the market. When the Cold War was in full swing and the So- 
viet Union was intact, the people of the world could choose (at least theoreti- 
cally) which ideology they wanted to consume; there were the two poles, and 
there was much in between. That meant capitalism had to win customers; it 


needed to offer incentives; it needed a good product. Keynesianism was al- 
ways an expression of that need for capitalism to compete. President Roose- 
velt brought in the New Deal not only to address the desperation of the Great 
Depression but to undercut a powerful movement of U.S. citizens who, hav- 
ing been dealt a savage blow by the unregulated free market, were demanding 
a different economic model. Some wanted a radically different one: in the 
1932 presidential elections, one million Americans voted for Socialist or 
Communist candidates. Growing numbers of Americans were also paying 
close attention to Huey Long, the populist senator from Louisiana who be- 
lieved that all Americans should receive a guaranteed annual income of 
$2,500. Explaining why he had added more social welfare benefits to the 
New Deal in 1935, FDR said he wanted to "steal Long's thunder." 6 

It was in this context that American industrialists grudgingly accepted 
FDR's New Deal. The edges of the market needed to be softened with pub- 
lic sector jobs and by making sure no one went hungry— the very future of 
capitalism was at stake. During the Cold War, no country in the free world 
was immune to this pressure. In fact, the achievements of mid-century capi- 
talism, or what Sachs calls "normal" capitalism— workers' protections, pen- 
sions, public health care and state support for the poorest citizens in North 
America— all grew out of the same pragmatic need to make major conces- 
sions in the face of a powerful left. 

The Marshall Plan was the ultimate weapon deployed on this economic 
front. After the war, the German economy was in crisis, threatening to bring 
down the rest of Western Europe. Meanwhile, so many Germans were 
drawn to socialism that the U.S. government opted to split Germany into two 
parts rather than risk losing it all, either to collapse or to the left. In West Ger- 
many, the U.S. government used the Marshall Plan to build a capitalist sys- 
tem that was not meant to create fast and easy new markets for Ford and 
Sears but, rather, to be so successful on its own terms that Europe's market 
economy would thrive and socialism would be drained of its appeal. 

By 1949, that meant tolerating from the West German government all 
kinds of policies that were positively uncapitalist: direct job creation by the 
state, huge investment in the public sector, subsidies for German firms and 
strong labour unions. In a move that would have been unthinkable in Russia 
in the 1990s or Iraq under U.S. occupation, the U.S. government infuriated 
its own corporate sector by imposing a moratorium on foreign investment 
so that war-battered German companies would not be forced to compete 
before they had recovered. "The feeling was that letting foreign companies 


come in at that point would have been like piracy/' I was told by Carolyn 
Eisenberg, author of an acclaimed history of the Marshall Plan. 7 "The main 
difference between now and then is that the U.S. government did not see 
Germany as a cash cow. They didn't want to antagonize people. The belief 
was that if you come in and start pillaging the place, you interfere with the 
recovery of Europe as a whole." 

This approach, Eisenberg points out, was not born of altruism. "The Soviet 
Union was like a loaded gun. The economy was in crisis, there was a substan- 
tial German left, and they [the West] had to win the allegiance of the German 
people fast. They really saw themselves battling for the soul of Germany." 

Eisenberg s account of the battle of ideologies that created the Marshall 
Plan points to a persistent blind spot in Sachs's work, including his recent 
laudable efforts to dramatically increase aid spending for Africa. Rarely are 
mass popular movements even mentioned. For Sachs, the making of history 
is a purely elite affair, a matter of getting the right technocrats settled on the 
right policies. Just as shock therapy programs are drafted in secret bunkers in 
La Paz and Moscow, so, apparently, should a $30 billion aid program for the 
Soviet republics have materialized based solely on the commonsense argu- 
ments he was making in Washington. As Eisenberg notes, however, the orig- 
inal Marshall Plan came about not out of benevolence, or even reasoned 
argument, but fear of popular revolt. 

Sachs admires Keynes, but he seems uninterested in what made Keyne- 
sianism finally possible in his own country: the messy, militant demands of 
trade unionists and socialists whose growing strength turned a more radical so- 
lution into a credible threat, which in turn made the New Deal look like an ac- 
ceptable compromise. This unwillingness to recognize the role of mass 
movements in pressuring reluctant governments to embrace the very ideas he 
advocates has had serious ramifications. For one, it meant that Sachs could not 
see the most glaring political reality confronting him in Russia: there was 
never going to be a Marshall Plan for Russia because there was only ever a 
Marshall Plan because of Russia. When Yeltsin abolished the Soviet Union, 
the "loaded gun" that had forced the development of the original plan was dis- 
armed. Without it, capitalism was suddenly free to lapse into its most savage 
form, not just in Russia but around the world. With the Soviet collapse, the 
free market now had a global monopoly, which meant all the "distortions" that 
had been interfering with its perfect equilibrium were no longer required. 

This was the real tragedy of the promise made to the Poles and Russians— 
that if they followed shock therapy they would suddenly wake up in a "normal 


European country." Those normal European countries (with their strong so- 
cial safety nets, workers' protections, powerful trade unions and socialized 
health care) emerged as a compromise between Communism and capital- 
ism. Now that there was no need for compromise, all those moderating so- 
cial policies were under siege in Western Europe, just as they were under 
siege in Canada, Australia and the U.S. Such policies were not about to be 
introduced in Russia, certainly not subsidized with Western funds. 

This liberation from all constraints is, in essence, Chicago School econom- 
ics (otherwise known as neoliberalism or, in the U.S., neoconservatism): not 
some new invention but capitalism stripped of its Keynesian appendages, cap- 
italism in its monopoly phase, a system that has let itself go— that no longer 
has to work to keep us as customers, that can be as antisocial, antidemocratic 
and boorish as it wants. As long as Communism was a threat, the gentlemen's 
agreement that was Keynesianism would live on; once that system lost ground, 
all traces of compromise could finally be eradicated, thereby fulfilling the 
purist goal Friedman had set out for his movement a half century earlier. 

That was the real point of Fukuyama's dramatic "end of history" an- 
nouncement at the University of Chicago lecture in 1989: he wasn't actually 
claiming that there were no other ideas in the world, but merely that, with 
Communism collapsing, there were no other ideas sufficiently powerful to 
constitute a head-to-head competitor. 

So while Sachs saw the collapse of the Soviet Union as a liberation from au- 
thoritarian rule and was ready to roll up his sleeves and start helping, his 
Chicago School colleagues saw it as a freedom of a different sort—as the final 
liberation from Keynesianism and the do-gooder ideas of men like Jeffrey 
Sachs. Seen in that light, the do-nothing attitude that so infuriated Sachs when 
it came to Russia was not "sheer laziness" but laissez-faire in action: let it go, 
do nothing. By not lifting a finger to help, all the men charged with Russian 
policy— from Dick Cheney, as Bush Sr/s defense secretary, to Lawrence Sum- 
mers, Treasury undersecretary, to Stanley Fischer at the IMF— were indeed 
doing something: they were practicing pure Chicago School ideology, letting 
the market do its worst. Russia, even more than Chile, was what this ideology 
looked like in practice, a foreshadowing of the get-rich-or-die-trying dystopia 
that many of these same players would create a decade later in Iraq. 

The new rules of the game were on display in Washington, D.C., on January 
13, 1993. The occasion was a small but important conference, by invitation 
only, on the tenth floor of the Carnegie Conference Center on Dupont 


Circle, a seven-minute drive from the White House and a stone's throw from 
the headquarters of the IMF and the World Bank. John Williamson, the 
powerful economist known for shaping the missions of both the bank and the 
fund, had convened the event as a historic gathering of the neoliberal tribe. 
In attendance was an impressive array of the star "technopols" who were at 
the forefront of the campaign to spread the Chicago doctrine throughout the 
world. There were present and former finance ministers from Spain, Brazil 
and Poland, central bank heads from Turkey and Peru, the chief of staff for 
the president of Mexico and a former president of Panama. There was 
Sachs's old friend and hero, Leszek Balcerowicz, architect of Poland's shock 
therapy, as well as his Harvard colleague Dani Rodrik, the economist who 
had proven that every country that had accepted neoliberal restructuring 
had been in deep crisis. Anne Krueger, future first deputy managing director 
of the IMF, was there, and although Jose Pinera, Pinochet's most evangelical 
minister, couldn't make it because he was trailing in Chile's presidential 
election, he sent a detailed paper in his place. Sachs, who was still advising 
Yeltsin at the time, was to deliver the keynote address. 

All day long, the conference participants had been indulging in that fa- 
vorite economists' pastime of strategizing how to get reluctant politicians to 
embrace policies that are unpopular with voters. How soon after elections 
should shock therapy be launched? Are center-left parties more effective 
than right-wing ones because the attack is unexpected? Is it better to warn 
the public or take people by surprise with "voodoo politics"? Though the 
conference was called "The Political Economy of Policy Reform"— so will- 
fully bland a title that it seemed designed to deflect media interest— one par- 
ticipant remarked slyly that what it was really about was "Machiavellian 
economics." 8 

Sachs listened to all this talk for several hours, and after dinner he went to 
the podium to give his address, titled, in true Sachsian fashion, "Life in the 
Economic Emergency Room" 9 He was visibly agitated. The crowd was 
ready to hear a speech from one of their idols, the man who had carried the 
torch of shock therapy into the democratic era. Sachs was in no mood for 
self-congratulation. Instead, he was determined to use the speech, he later 
explained to me, to try to get this powerful crowd to grasp the gravity of what 
was unfolding in Russia. 

He reminded his audience of the infusions of aid that had gone to Europe 
and Japan after the Second World War, "vital for Japan's later magnificent 



success." He told a story about getting a letter from an analyst at the Heritage 
Foundation— ground zero of Friedmanism— who "believed strongly in Rus- 
sia's reforms but not in foreign aid for Russia. This is a common view of free- 
market ideologues— of which I am one " Sachs said. "It is plausible but it is 
mistaken. The market cannot do it all by itself; international help is crucial." 
The laissez-faire obsession was taking Russia into catastrophe, where, he 
said, "no matter how valiant, brilliant, and lucky are Russia's reformers, they 
won't make it without large-scale external assistance ... we are close to miss- 
ing a historic opportunity." 

Sachs got a round of applause, of course, but the response was tepid. Why 
was he praising such lavish social spending? This crowd was on a global cru- 
sade to dismantle the New Deal, not to forge a new one. In the conference 
sessions that followed, not a single participant supported Sachs's challenge, 
and several spoke out against it. 

What he was trying to do with the speech, Sachs told me, was "explain 
what a real crisis was like ... to convey a sense of urgency." People who 
make policy from Washington, he said, often "don't understand what eco- 
nomic chaos is. They don't understand the disarray that comes." He wanted 
to confront them with the reality that "there's also a dynamic that things get 
farther and farther out of control, until you have other disasters, until Hitler 
comes back in power, until you have civil war, or mass famine or whatever it 
is. . . . You need to do emergency things to help, because an unstable situa- 
tion definitely has a path of increasing instability, not just a path to normal 

I couldn't help thinking that Sachs wasn't giving his audience enough 
credit. The people in that room were well versed in Milton Friedman's crisis 
theory, and many had applied it in their own countries. Most understood 
perfectly how wrenching and volatile an economic meltdown could be, but 
they were taking a different lession from Russia: that a painful and disorient- 
ing political situation was forcing Yeltsin to rapidly auction off the riches of 
the state, a distinctly favorable outcome. 

It was left to John Williamson, the host of the conference, to steer the dis- 
cussion back to those pragmatic priorities. Sachs was the one with the star 
power at the event, but it was Williamson who was the crowd's real guru. 
Balding and untelegenic but thrillingly politically incorrect, Williamson 
was the one who coined the phrase "the Washington Consensus"— perhaps 
the most quoted and contentious three words in modern economics. He is 


famous for his tightly structured closed-door conferences and seminars, each 
designed to test one of his bold hypotheses. At the conference in January, he 
had a pressing agenda: he wanted to test what he called the "crisis hypothe- 
sis" once and for all. 10 

In his lecture, Williamson offered no warnings of the imperative to save 
any country from crisis; in fact, he spoke rhapsodically of cataclysmic events. 
He reminded his audience of the indisputable evidence that only when 
countries are truly suffering do they agree to swallow their bitter market med- 
icine; only when they are in shock do they lie down for shock therapy. 
"These worst of times give rise to the best of opportunities for those who un- 
derstand the need for fundamental economic reform," he declared. 11 

With his unparalleled knack for verbalizing the subconscious of the fi- 
nancial world, Williamson casually pointed out that this raised some intrigu- 
ing questions: 

One will have to ask whether it could conceivably make sense to think 
of deliberately provoking a crisis so as to remove the political logjam to 
reform. For example, it has sometimes been suggested in Brazil that it 
would be worthwhile stoking up a hyperinflation so as to scare every- 
one into accepting those changes. . . . Presumably no one with histor- 
ical foresight would have advocated in the mid-1930s that Germany or 
Japan go to war in order to get the benefits of the supergrowth that fol- 
lowed their defeat. But could a lesser crisis have served the same func- 
tion? Is it possible to conceive of a pseudo-crisis that could serve the 
same positive function without the cost of a real crisis? 12 

Williamson's remarks represented a major leap forward for the shock doc- 
trine. In a room filled with enough finance ministers and central bank chiefs 
to hold a major trade summit, the idea of actively creating a serious crisis so 
that shock therapy could be pushed through was now being openly discussed. 

At least one conference participant felt obliged to distance himself in his 
own speech from these risque ideas. "Williamson's suggestion that it might 
be a good move to provoke an artificial crisis in order to trigger reform 
should best be read as an idea designed to provoke and tease," said John 
Toye, a British economist from the University of Sussex. 13 There was no evi- 
dence that Williamson was teasing. In fact, there was plenty of evidence that 
his ideas were already being acted on at the highest levels of financial deci- 
sion making in Washington and beyond. 



The month after Williamson's conference in Washington, we caught a 
glimpse of the new enthusiasm for "pseudo crisis" in my country, although 
few understood it as part of a global strategy at the time. In February 1993, 
Canada was in the midst of financial catastrophe, or so one would have con- 
cluded by reading the newspapers and watching TV. "Debt Crisis Looms," 
screamed a banner front-page headline in the national newspaper, the Globe 
and Mail. A major national television special reported that "economists are 
predicting that sometime in the next year, maybe two years, the deputy min- 
ister of finance is going to walk into cabinet and announce that Canada's 
credit has run out. . . . Our lives will change dramatically." 14 

The phrase "debt wall" suddenly entered the vocabulary. What it meant 
was that, although life seemed comfortable and peaceful now, Canada was 
spending so far beyond its means that, very soon, powerful Wall Street firms 
like Moody's and Standard and Poor's would downgrade our national credit 
rating from its perfect Triple A status to something much lower. When that 
happened, hypermobile investors, liberated by the new rules of globalization 
and free trade, would simply pull their money from Canada and take it 
somewhere safer. The only solution, we were told, was to radically cut spend- 
ing on such programs as unemployment insurance and health care. Sure 
enough, the governing Liberal Party did just that, despite having just been 
elected on a platform of job creation (Canada's version of "voodoo politics"). 

Two years after the deficit hysteria peaked, the investigative journalist 
Linda McQuaig definitively exposed that a sense of crisis had been carefully 
stoked and manipulated by a handful of think tanks funded by the largest 
banks and corporations in Canada, particularly the C. D. Howe Institute and 
the Fraser Institute (which Milton Friedman had always actively and strongly 
supported). 15 Canada did have a deficit problem, but it wasn't caused by 
spending on unemployment insurance and other social programs. According 
to Statistics Canada, it was caused by high interest rates, which exploded the 
worth of the debt much as the Volcker Shock had ballooned the developing 
world's debt in the eighties. McQuaig went to Moody's Wall Street head of- 
fice and spoke with Vincent Truglia, the senior analyst in charge of issuing 
Canada's credit rating. He told her something remarkable: that he had come 
under constant pressure from Canadian corporate executives and bankers to 
issue damning reports about the country's finances, something he refused to 
do because he considered Canada an excellent, stable investment. "It's the 
only country that I handle where, usually, nationals from that country want 


the country downgraded even more — on a regular basis. They think it's 
rated too highly." He said he was used to getting calls from country repre- 
sentatives telling him he had issued too low a rating. "But Canadians usu- 
ally, if anything, disparage their country far more than foreigners do." 

That's because, for the Canadian financial community, the "deficit crisis" 
was a critical weapon in a pitched political battle. At the time Truglia was get- 
ting those strange calls, a major campaign was afoot to push the government 
to lower taxes by cutting spending on social programs such as health and ed- 
ucation. Since these programs are supported by an overwhelming majority of 
Canadians, the only way the cuts could be justified was if the alternative was 
national economic collapse— a full-blown crisis. The fact that Moody's kept 
giving Canada the highest possible bond rating— the equivalent of an A++— 
was making it extremely difficult to maintain the apocalyptic mood. 

Investors, meanwhile, were getting confused by the mixed messages: 
Moody's was upbeat about Canada, but the Canadian press contantly pre- 
sented the national finances as catastrophic. Truglia got so fed up with the 
politicized statistics coming out of Canada, which he felt were calling his 
own research into question, that he took the extraordinary step of issuing a 
"special commentary" clarifying that Canada's spending was "not out of con- 
trol," and he even aimed some veiled shots at the dodgy math practiced by 
right-wing think tanks. "Several recently published reports have grossly exagger- 
ated Canada's fiscal debt position. Some of them have double counted num- 
bers, while others have made inappropriate international comparisons. . . . 
These inaccurate measurements may have played a role in exaggerated eval- 
uations of the severity of Canada's debt problems." With Moody's special re- 
port, word was out that there was no looming "debt wall"— and Canada's 
business community was not pleased. Truglia says that when he put out the 
commentary, "one Canadian . . . from a very large financial institution in 
Canada called me up on the telephone screaming at me, literally screaming 
at me. That was unique."* 16 

By the time Canadians learned that the "deficit crisis" had been grossly 
manipulated by the corporate-funded think tanks, it hardly mattered— the 
budget cuts had already been made and locked in. As a direct result, social 
programs for the country's unemployed were radically eroded and have never 
recovered, despite many subsequent surplus budgets. The crisis strategy was 

* It must be said that Truglia is a rarity on Wall Street— bond and credit ratings are often 
influenced by political pressure, and are used to increase the pressure to enact "market 


used again and again in this period. In September 1995, a video was leaked to 
the Canadian press of John Snobelen, Ontario's minister of education, telling 
a closed-door meeting of civil servants that before cuts to education and other 
unpopular reforms could be announced, a climate of panic needed to be cre- 
ated by leaking information that painted a more dire picture than he "would 
be inclined to talk about." He called it "creating a useful crisis." 17 

"Statistical Malpractice" in Washington 

By 1995, political discourse in most Western democracies was saturated with 
talk of debt walls and imminent economic collapse, demanding ever-deeper 
cuts and more ambitious privatizations, with the Friedmanite think tanks al- 
ways out front crying crisis. At Washington's most powerful financial institu- 
tions, however, there was a willingness not only to create an appearance of 
crisis through the media but also to take concrete measures to generate crises 
that were all too real. Two years after Williamson made his observations about 
"stoking up" crisis, Michael Bruno, chief economist of development eco- 
nomics at the World Bank, publicly echoed the same line, once again without 
attracting media scrutiny. In a lecture to the International Economic Associ- 
ation in Tunis in 1995, later published as a paper by the World Bank, Bruno 
informed five hundred assembled economists from sixty-eight countries that 
there was a growing consensus about "the idea that a large enough crisis may 
shock otherwise reluctant policymakers into instituting productivity- 
enhancing reforms."* 18 Bruno pointed to Latin America as "a prime example 
of seemingly beneficial deep crises" and to Argentina in particular, where, he 
said, President Carlos Menem and his finance minister, Domingo Cavallo, 
were doing a fine job of "taking advantage of the emergency atmosphere" to 
push through deep privatization. Just in case the audience missed the point, 
Bruno said, "I have emphasized one major theme: the political economy of 
deep crises tends to yield radical reforms with positive outcomes." 

In light of this fact, he argued that international agencies needed to do 
more than just take advantage of existing economic crises to push through 
the Washington Consensus— they needed to preemptively cut off aid to 
make those crises worse. "An adverse shock (such as a drop in government 

* Though Bruno did not attend the University of Chicago, he studied under and was mentored 
by the prominent Chicagoan Don Patinkin, quoted earlier comparing Chicago economics to 
Marxism for its "logical completeness." 


revenue or in external transfers) may actually increase welfare because it 
shortens the delay [before reforms are adopted]. The notion that 'things have 
to get worse before they can get better' emerges naturally. ... In fact, a high- 
inflation crisis may leave a country better off than if it had muddled along 
through less severe crises." 

Bruno conceded that deepening or creating a serious economic melt- 
down was frightening— government salaries would go unpaid, public infra- 
structure would rot— but, Chicago disciple that he was, he urged his 
audience to embrace this destruction as the first stage of creation. "Indeed, 
as the crisis deepens the government may gradually wither away" Bruno 
said. "This development has a positive outcome; namely, at the time of re- 
form the power of entrenched groups may have been weakened— and a 
leader who opts for the long-run solution over short-term expediency may 
win support for reform." 19 

The Chicago School crisis addicts were certainly on a speedy intellectual 
trajectory. Only a few years earlier, they had speculated that a hyperinflation 
crisis could create the shocking conditions required for shock policies. Now 
a chief economist at the World Bank, an institution funded, by this time, 
with tax dollars from 178 countries and whose mandate was to rebuild and 
strengthen struggling economies, was advocating the creation of failed states 
because of the opportunities they provided to start over in the rubble. 20 

For years, there had been rumors that the international financial institutions 
had been dabbling in the art of "pseudo-crisis," as Williamson put it, in order 
to bend countries to their will, but it was difficult to prove. The most exten- 
sive testimony came from Davison Budhoo, an IMF staffer turned whistle- 
blower, who accused the organization of cooking the books in order to doom 
the economy of a poor but strong-willed country. 

Budhoo was a Grenadian-born, London School of Economics-trained 
economist who stood out in Washington thanks to an unconventional ap- 
proach to personal style: he let his hair stand straight on end, a la Albert Ein- 
stein, and preferred the windbreaker to the pinstripe suit. He had worked at 
the IMF for twelve years, where his job was designing structural adjustment 
programs for Africa, Latin America and his native Caribbean. After the orga- 
nization took its sharp right turn during the Reagan/Thatcher era, the inde- 
pendent-minded Budhoo felt increasingly ill at ease in his place of work. The 
fund was packed with zealous Chicago Boys under the leadership of its man- 
aging director, the staunch neoliberal Michel Camdessus. When Budhoo 


quit in 1988, he decided to devote himself to exposing the secrets of his former 
workplace. It began when he wrote a remarkable open letter to Camdessus, 
adopting the j'accuse tone of Andre Gunder Frank's letters to Friedman a de- 
cade earlier. 

Showing an enthusiasm for language rare for senior fund economists, the 
letter began: "Today I resigned from the staff of the International Monetary 
Fund after over twelve years, and after 1000 days of official Fund work in the 
field, hawking your medicine and your bag of tricks to governments and to 
peoples in Latin America and the Caribbean and Africa. To me resignation 
is a priceless liberation, for with it I have taken the first big step to that place 
where I may hope to wash my hands of what in my mind's eye is the blood of 
millions of poor and starving peoples. . . . The blood is so much, you know, 
it runs in rivers. It dries up, too; it cakes all over me; sometimes I feel that 
there is not enough soap in the whole world to cleanse me from the things 
that I did do in your name." 21 

He then went on to build his case. Budhoo accused the fund of using sta- 
tistics as "lethal" weapons. He exhaustively documented how, as a fund em- 
ployee in the mid-eighties, he was involved in elaborate "statistical 
malpractices" to exaggerate the numbers in IMF reports on oil-rich Trinidad 
and Tobago in order to make the country look far less stable than it actually 
was. Budhoo contended that the IMF had more than doubled a crucial sta- 
tistic measuring the labor costs in the country, making it appear highly 
unproductive — even though, as he said, the fund had the correct informa- 
tion on hand. In another instance, he claimed that the fund "invented, liter- 
ally out of the blue " huge unpaid government debts. 22 

Those "gross irregularities," which Budhoo claims were deliberate and 
not mere "sloppy calculations," were taken as fact by the financial markets, 
which promptly classified Trinidad as a bad risk and cut off its financing. 
The country's economic problems— triggered by a drop in the price of oil, its 
primary export— quickly became calamitous, and it was forced to beg the 
IMF for a bailout. The fund then demanded that it accept what Budhoo 
described as the IMF's "deadliest medicine": layoffs, wage cuts and the 
"whole gamut" of structural adjustment policies. He described the process as 
the "deliberate blocking of an economic lifeline to the country through sub- 
terfuge" in order to see "Trinidad and Tobago destroyed economically first, 
and converted thereafter." 

In his letter, Budhoo, who died in 2001, made it clear that his dispute was 
over more than the treatment of one country by a handful of officials. He 


characterized the IMF's entire program of structural adjustment as a form of 
mass torture in which " 'screaming-in-pain' governments and peoples [are] 
forced to bend on their knees before us, broken and terrified and disintegrat- 
ing, and begging for a sliver of reasonableness and decency on our part. But 
we laugh cruelly in their face, and the torture goes on unabated." 

After the letter was published, the government of Trinidad commissioned 
two independent studies to investigate the allegations and found that they 
were correct: the IMF had inflated and fabricated numbers, with tremen- 
dously damaging results for the country. 23 

Even with this substantiation, however, Budhoo's explosive allegations 
disappeared virtually without a trace; Trinidad and Tobago is a collection of 
tiny islands off the coast of Venezuela, and unless its people storm the head- 
quarters of the IMF on Nineteenth Street, its complaints are unlikely to cap- 
ture world attention. The letter was, however, turned into a play in 1996 
called Mr. Budhoo's Letter of Resignation from the I.M.F. (SO Years Is 
Enough), put on in a small theater in New York's East Village. The produc- 
tion received a surprisingly positive review in The New York Times, which 
praised its "uncommon creativity" and "inventive props." 24 The short theater 
review was the only time Budhoo's name was ever mentioned in The New 
York Times. 




Money flows to where opportunity is, and, right now, Asia appears 
to be cheap. 

—Gerard Smith, a financial institutions banker at UBS Securities in 
New York, on the Asian economic crisis of 1 997-98 1 

Good times make bad policy. 

—Mohammad Sadli, economic adviser to Indonesia's General 
Suharto 2 

They seemed like simple questions. What can your salary buy? Is it enough 
for room and board? Is there any left over to send money back to your par- 
ents? How about transportation costs to and from the factory? But no matter 
how I phrased them, the answers I kept getting were "It depends." Or "I don't 

"A few months ago," a seventeen-year-old worker who sewed Gap cloth- 
ing near Manila explained, "I used to have enough money to send a little bit 
home to my family every month, but now I don't even make enough to buy 
food for myself." 

"Are they lowering your wages?" I asked. 

"No, I don't think so," she said, a little confused. "It just doesn't buy as 
much. The prices keep rising." 

It was the summer of 1997, and I was in Asia researching the working con- 
ditions inside the region's booming export factories. I found workers facing a 
problem bigger than forced overtime or abusive supervisors: their countries 


were rapidly falling into what would soon become a full-fledged depression. 
In Indonesia, where the crisis was even deeper, the atmosphere felt danger- 
ously volatile. The Indonesian currency dropped between morning and 
nightfall over and over and again. One day factory workers could buy fish 
and rice, and the next day they were subsisting on rice alone. In casual con- 
versations at restaurants and in taxis, everyone seemed to have the same the- 
ory about who was to blame: "the Chinese," I was told. It was ethnic Chinese 
people, as Indonesia's merchant class, who seemed to be profiting most di- 
rectly from the rising prices, and so they were bearing the brunt of the anger. 
This is what Keynes had meant when he warned of the dangers of economic 
chaos— you never know what combination of rage, racism and revolution 
will be unleashed. 

Southeast Asian countries were particularly vulnerable to conspiracy the- 
ories and ethnic scapegoating because, on the face of it, the financial crisis 
had no rational cause. On television and in newspapers, analysis kept refer- 
ring to the region as if it had contracted some mysterious but highly conta- 
gious disease — "the Asian Flu," as the market crash was immediately 
labeled, later upgraded to "the Asian Contagion" when it spread to Latin 
America and Russia. 

Just weeks before it all went wrong, these countries were being held up as 
paragons of economic fitness and vitality— the so-called Asian Tigers, glob- 
alization's most robust success stories. One minute, stockbrokers were telling 
their clients that there was no surer route to wealth than sinking your savings 
in Asian "emerging market" mutual funds; the next they were cashing out in 
droves, while traders "attacked" the currencies— the baht, the ringgit, the 
rupiah— creating what The Economist called "a destruction of savings on a 
scale more usually associated with a full-scale war." 3 And yet, within Asia's 
Tiger economies, nothing observable had changed— for the most part, they 
were still run by the same crony elite; they had not been hit by a natural dis- 
aster or war; they were not running large deficits — some had none at all. 
Many large conglomerates were carrying heavy debts, but they were still pro- 
ducing everything from sneakers to cars, and their sales were as strong as 
ever. So how was it possible that, in 1996, investors had seen fit to pour $100 
billion into South Korea and then, the very next year, the country had a neg- 
ative investment of $20 billion— a discrepancy of $120 billion? 4 What could 
explain this kind of monetary whiplash? 

It turned out that the countries were victims of pure panic, made lethal by 
the speed and volatility of globalized markets. What began as a rumor— that 



Thailand did not have enough dollars to back up its currency— triggered a 
stampede by the electronic herd. Banks called in their loans, and the real es- 
tate market, which had been growing so quickly that it had become a bub- 
ble, promptly popped. Construction ground to a halt on half-built malls, 
skyscrapers and resorts; motionless construction cranes loomed over 
Bangkok's crowded skyline. In a slower era of capitalism, the crisis might 
have stopped there, but because mutual fund brokers had marketed the 
Asian Tigers as part of a single investment package, when one Tiger went 
down, they all did: after Thailand, panic spread and money fled from In- 
donesia, Malaysia, the Philippines and even South Korea, the eleventh- 
largest economy in the world and a star in the globalization firmament. 

Asian governments were forced to drain their reserve banks in an effort to 
prop up their currencies, turning the original fear into a reality: now these 
countries really were going broke. The market responded with more panic. 
In one year, $600 billion had disappeared from the stock markets of Asia — 
wealth that had taken decades to build. 5 

The crisis provoked desperate measures. In Indonesia, impoverished citi- 
zens stormed urban stores and took what they could carry. In one particu- 
larly horrific incident, a Jakarta shopping mall caught fire while it was being 
looted, and hundreds of people were burned alive. 6 

In South Korea, television stations ran a massive campaign calling on cit- 
izens to donate their gold jewelry so that it could be melted down and used 
to pay off the country's debts. In just a few weeks, 3 million people had 
handed over necklaces, earrings, sports medals and trophies. At least one 
woman donated her wedding ring, and a cardinal donated his golden cross. 
The television stations ran kitschy give-away-your-gold game shows, but even 
with two hundred tons of gold collected, enough to drive down the world 
price, Korea's currency continued to plummet. 7 

As had happened during the Great Depression, the crisis led to a wave of 
suicides as families saw their life savings disappear and tens of thousands of 
small businesses shut their doors. In South Korea, the suicide rate went up 
by 50 percent in 1998. The spike was steepest among people over sixty, with 
older parents attempting to lessen the economic burden on their struggling 
children. The Korean press also reported an alarming increase in family sui- 
cide pacts in which fathers led their debt-ridden households in group hang- 
ings. Authorities pointed out that since "only the [family] leader's death is 
classified as suicide while the rest are listed as murders, the actual number of 
suicides is far higher than the statistics released." 8 


Asia's crisis was caused by a classic fear cycle, and the only move that 
might have arrested it was the same one that had rescued Mexico's currency 
during the so-called Tequila Crisis of 1994: a quick, decisive loan— proof to 
the market that the U.S. Treasury would simply not let Mexico fail. 9 No such 
timely move was forthcoming for Asia. In fact, as soon as the crisis hit, a sur- 
prising array of heavy hitters from the financial establishment stepped for- 
ward with a unified message: Don't help Asia. 

Milton Friedman himself, now in his mid-eighties, made a rare appearance 
on CNN to tell the news anchor Lou Dobbs that he opposed any kind of 
bailout and that the market should be left to correct itself. "Well, Professor, I 
can't tell you what it means to have your support in this semantic discussion," 
said an embarassingly starstruck Dobbs. The let-them-sink position was echoed 
by Friedman's old friend Walter Wriston, former head of Citibank, and George 
Shultz, now working alongside Friedman at the right-wing Hoover Institution 
and a board member at the brokerage house Charles Schwab. 10 

The view was openly shared by one of Wall Street's premier investment 
banks, Morgan Stanley. Jay Pelosky, the firm's hotshot emerging-market 
strategist, told a conference in Los Angeles hosted by the Milken Institute (of 
junk bonds fame) that it was imperative that the IMF and the U.S. Treasury 
do nothing to lessen the pain of a crisis of 1930s proportions. "What we need 
now in Asia is more bad news. Bad news is needed to keep stimulating the 
adjustment process," Pelosky said. 11 

The Clinton administration took its cue from Wall Street. When the Asia 
Pacific Economic Cooperation Summit was held in November 1997 in Van- 
couver, four months into the crash, Bill Clinton enraged his Asian counter- 
parts by dismissing what they viewed as an economic apocalypse as "a few 
little glitches in the road." 12 The message was clear: the U.S. Treasury was in 
no rush to stop the pain. As for the IMF, the world body created to prevent 
crashes like this one, it took the do-nothing approach that had become its 
trademark since Russia. It did, eventually, respond— but not with the sort of 
fast, emergency stabilization loan that a purely financial crisis demanded. 
Instead, it came up with a long list of demands, pumped up by the Chicago 
School certainty that Asia's catastrophe was an opportunity in disguise. 

Back in the early nineties, whenever advocates of free trade wanted a persua- 
sive success story to invoke in debates, they invariably pointed to the Asian 
Tigers. These were the miracle economies that were growing by leaps and 
bounds, supposedly because they had flung open their borders to unrestricted 



globalization. It was a useful story— the Tigers were certainly developing 
with whirlwind speed— but to suggest that their expansion was based on free 
trade was fiction. Malaysia, South Korea and Thailand still had highly pro- 
tectionist policies that barred foreigners from owning land and from buying 
out national firms. They had also maintained a significant role for the state, 
keeping sectors like energy and transportation in public hands. The Tigers 
had also blocked many foreign imports from Japan, Europe and North 
America, as they built up their own domestic markets. They were economic 
success stories unquestionably, but ones that proved that mixed, managed 
economies grew faster and more equitably than those following the Wild 
West Washington Consensus. 

The situation did not please Western and Japanese investment banks and 
multinational firms; watching Asia's consumer market explode, they under- 
standably longed for unfettered access to the region to sell their products. 
They also wanted the right to buy up the best of the Tigers' corporations — 
particularly Korea's impressive conglomerates like Daewoo, Hyundai, Sam- 
sung and LG. In the mid-nineties, under pressure from the IMF and the 
newly created World Trade Organization, Asian governments agreed to split 
the difference: they would maintain the laws that protected national firms 
from foreign ownership and resist pressure to privatize their key state compa- 
nies, but they would lift barriers to their financial sectors, allowing a surge of 
paper investing and currency trading. 

In 1997, when the flood of hot money suddenly reversed current in Asia, 
it was a direct result of this kind of speculative investment, which was legal- 
ized only because of Western pressure. Wall Street, of course, didn't see it 
that way. Top investment analysts instantly recognized the crisis as the 
chance to level the remaining barriers protecting Asia's markets once and for 
all. Pelosky, the Morgan Stanley strategist, was particularly forthright about 
the logic: if the crisis was left to worsen, all foreign currency would be 
drained from the region and Asian-owned companies would have either to 
close down or to sell themselves to Western firms— both beneficial outcomes 
for Morgan Stanley. "I'd like to see closure of companies and asset sales. . . . 
Asset sales are very difficult; typically owners don't want to sell unless they're 
forced to. Therefore, we need more bad news to continue to put the pressure 
on these corporates to sell their companies." 13 

Some saw the breaking of Asia in even grander terms. Jose Pinera, 
Pinochet's star minister who was now working at the Cato Institute in Wash- 
ington, D.C., greeted the crisis with undisguised glee, pronouncing that "the 


day of reckoning has arrived." In Pinera's eyes, the crisis was the latest chap- 
ter in the war that he and his fellow Chicago Boys had started in Chile in the 
seventies. The fall of the Tigers, he said, represented nothing less than "the 
fall of a second Berlin Wall," the collapse of "the notion that there is a Third 
Way' between free-market democratic capitalism and socialist statism." 14 

Pinera's was not a fringe perspective. It was openly shared by Alan 
Greenspan, chairman of the U.S. Federal Reserve and probably the single 
most powerful economic policy maker in the world. Greenspan described 
the crisis as "a very dramatic event towards a consensus of the type of market 
system which we have in this country." He also observed that "the current 
crisis is likely to accelerate the dismantling in many Asian countries of the 
remnants of a system with large elements of government-directed invest- 
ment." 15 In other words, the destruction of Asia's managed economy was ac- 
tually a process of creating a new American-style economy— birth pangs for 
a new Asia, to borrow a phrase that would be used in an even more violent 
context a few years later. 

Michel Camdessus, who as head of the IMF was arguably the world's sec- 
ond most powerful monetary policy maker, expressed a similar view. In a 
rare interview, he spoke of the crisis as an opportunity for Asia to shed its old 
skin and be born anew. "Economic models are not eternal," he said. "There 
are times when they are useful and other times . . . where they become out- 
dated and must be abandoned." 16 The crisis sparked by a rumor that turned 
fiction into fact apparently provided such a time. 

Eager not to let this opportunity slip by, the IMF— after months of doing 
nothing while the emergency worsened — finally entered into negotiations 
with the ailing governments of Asia. The only country to resist the fund in 
this period was Malaysia, thanks to its relatively small debt. Malaysia's con- 
troversial prime minister, Mahathir Mohamad, said that he did not think he 
should have to "destroy the economy in order that it should become better," 
which was enough to brand him as a raving radical at the time. 17 The rest of 
Asia's crisis-struck economies were too desperate for foreign currency to re- 
fuse the possibility of tens of billions in IMF loans: Thailand, the Philip- 
pines, Indonesia and South Korea all came to the table. "You can't force a 
country to ask you for help. It has to ask. But when it's out of money, it hasn't 
got many places to turn," said Stanley Fischer, who was in charge of the talks 
for the IMF. 18 

Fischer had been one of the most vocal advocates of shock therapy in 
Russia, and despite the harrowing human costs there, his attitude was just as 


unyielding in Asia. Several governments suggested that since the crisis was 
caused by the ease with which money could gush in and out of their coun- 
tries with nothing to slow down the flow, perhaps it made sense to put some 
barriers back up— the dreaded "capital controls." China had kept its controls 
up (ignoring Friedman's advice in this regard), and it was the only country in 
the region that was not being ravaged by the crisis. And Malaysia had put 
controls back up, and they seemed to be working. 

Fischer and the rest of the IMF team dismissed the idea out of hand. 19 
The IMF displayed no interest in what had actually caused the crisis. In- 
stead, like a prison interrogator looking for a weakness, the fund was exclu- 
sively focused on how the crisis could be used as leverage. The meltdown 
had forced a group of strong-willed countries to beg for mercy; to fail to take 
advantage of that window of opportunity was, for the Chicago School econ- 
omists running the IMF, tantamount to professional negligence. 

With their treasuries empty, the Tigers were, as far as the IMF was con- 
cerned, broken; now they were primed to be remade. The first stage of this 
process was to strip the countries of all the "trade and investment protection- 
ism and activist state intervention that were the key ingredients of the 'Asian 
miracle,' " as the political scientist Walden Bello put it. 20 The IMF also de- 
manded that the governments make deep budget cuts, leading to mass lay- 
offs of public sector workers in countries where people were already taking 
their own lives in record numbers. Fischer admitted after the fact that the 
IMF had concluded that in Korea and Indonesia, the crisis was unrelated to 
government overspending. Nonetheless, he used the extraordinary leverage 
granted by the crisis to extract these painful austerity measures. As one New 
York Times reporter wrote, the IMF's actions were "like a heart surgeon who, 
in the middle of an operation, decides to do some work on the lungs and kid- 
neys, too."* 21 

After the IMF had stripped the Tigers of their old habits and ways, they 
were now ready to be reborn, Chicago-style: privatized basic services, inde- 
pendent central banks, "flexible" workforces, low social spending and, of 

* The IMF is often portrayed as a puppet of the U.S. Treasury, but rarely have the strings been 
as clearly visible as during these negotiations. To make sure the interests of U.S. firms were 
reflected in the final agreements, David Lipton, U.S. Treasury undersecretary for interna- 
tional affairs (and Sachss former partner for Poland's shock therapy program), flew to South 
Korea and checked into the Seoul Hilton— the hotel where the negotiations between the IMF 
and the Korean government were taking place. Lipton's presence was, according to The 
Washington Post's Paul Blustein, "a visible manifestation of the influence the United States 
wields over IMF policy." 


course, total free trade. According to the new agreements, Thailand would al- 
low foreigners to own large stakes in its banks, Indonesia would cut food sub- 
sidies, and Korea would lift its law protecting workers against mass layoffs. 22 
The IMF even set strict layoff targets in Korea: in order to get the loan, the 
country's banking sector needed to shed 50 percent of its workforce (later low- 
ered to 30 percent). 23 This kind of demand was crucial for many Western 
multinationals who wanted assurances that they could radically downsize the 
Asian firms they were about to buy. Pinera's "Berlin Wall" was falling down. 

Such measures would have been unthinkable a year before the crisis hit, 
when South Korea's trade unions had been at their peak of militancy. They 
had greeted a proposed new labor law that would have reduced job security 
with the largest and most radical series of strikes in South Korea's history. 
But, thanks to the crisis, the rules of the game had changed. The economic 
meltdown was so dire that it gave governments the license (as similar crises 
had from Bolivia to Russia) to declare temporary authoritarian rule; it didn't 
last long— just long enough to impose the IMF decrees. 

Thailand's shock therapy package, for instance, was pushed through the 
National Assembly not in a normal process of debate but as a result of four 
emergency decrees. "We have lost our autonomy, our ability to determine our 
macroeconomic policy. This is unfortunate," conceded Thailand's deputy 
premier, Supachai Panitchpakdi (later rewarded for this kind of cooperative 
attitude by being named head of the WTO). 24 In South Korea, the IMF sub- 
version of democracy was even more overt. There, the end of the IMF negoti- 
ations coincided with scheduled presidential elections in which two of the 
candidates were running on anti-IMF platforms. In an extraordinary act of in- 
terference with a sovereign nation's political process, the IMF refused to re- 
lease the money until it had commitments from all four main candidates that 
they would stick to the new rules if they won. With the country effectively 
held at ransom, the IMF was triumphant: each candidate pledged his support 
in writing. 25 Never before had the central Chicago School mission to protect 
economic matters from the reach of democracy been more explicit: you can 
vote, South Koreans were told, but your vote can have no bearing on the 
managing and organization of the economy. (The day the deal was signed 
was instantly dubbed Korea's "National Humiliation Day.") 26 

In one of the worst-hit countries, such acts of democracy containment 
were not required. Indonesia, first in the region to fling open its doors to dereg- 
ulated foreign investment, was still under the control of General Suharto, 



after more than thirty years. Suharto, however, had become less compliant 
with the West in his old age (as dictators often do). After decades of selling off 
Indonesia's oil and mineral wealth to foreign corporations, he had grown 
bored with enriching others and had spent the previous decade or so taking 
care of himself, his children and his golfing buddies. For instance, the gen- 
eral had given heavy subsidies to a car company— owned by his son 
Tommy— much to the consternation of Ford and Toyota, who saw no reason 
why they should have to compete with what analysts called "Tommy's toys." 27 

For a few months, Suharto tried to resist the IMF, issuing a budget that 
did not contain the massive cuts it was demanding. The fund fought back by 
increasing the pain levels. Officially, IMF representatives are not allowed to 
talk to the press during a negotiation since the slightest indication of how 
talks are going can dramatically influence the market. That didn't stop an 
unnamed "senior IMF official" from telling The Washington Post that "the 
markets are asking themselves the question of just how much the senior In- 
donesian leadership is committed to this program, and particularly to the 
major reform measures." The article went on to predict that the IMF would 
punish Indonesia by withholding billions in promised loans. As soon as it ap- 
peared, Indonesia's currency fell through the floor, losing 25 percent of its 
value in a single day. 28 

With that massive blow, Suharto gave in. "Can someone find me an econ- 
omist who knows what's going on?" Indonesia's foreign minister reportedly 
pleaded. 29 Suharto found such an economist; in fact, he found several. 
Guaranteeing that the final IMF negotiations would go smoothly, he 
brought back the Berkeley Mafia who, after playing such a central role in the 
early days of his regime, had lost their influence with the aging general. After 
years in the political wilderness, they were once again in charge, with Wid- 
jojo Nitisastro, now seventy years old and known in Indonesia as "the dean of 
the Berkeley Mafia," heading up the negotiations. "When times are good, 
Widjojo and the economists are put in an obscure corner and President 
Suharto speaks to the cronies," explained Mohammad Sadli, a former Suharto 
minister. "The technocrat group is at its best in times of crisis. Suharto lis- 
tens to them more for the time being and he orders the other ministers to 
shut up." 30 Talks with the IMF now took a distinctly more collegial tone, 
more "like intellectual discussions. No pressure from one side on the other," 
explained a member of Widjojo's team. Naturally, the IMF got almost every- 
thing it wanted— 140 "adjustments" in all. 31 


The Reveal 

As far as the IMF was concerned, the crisis was going extremely well. In less 
than a year, it had negotiated the economic equivalent of extreme makeovers 
for Thailand, Indonesia, South Korea and the Philippines. 32 It was finally 
ready for the defining moment in every makeover drama: the Reveal, the mo- 
ment when the nipped-and-tucked, coached-and-buffed subject is unveiled 
to the awestruck public — in this case, the global stock and currency markets. 
If all had gone smoothly, when the IMF pulled back the curtain on its 
newest creations, the hot money that had fled Asia the previous year would 
have come rushing back in to buy up the Tigers' now irresistible stocks, 
bonds and currencies. Something else happened; the market panicked. The 
reasoning went like this: if the fund thought that the Tigers were such hope- 
less cases that they needed to be remade from scratch, then Asia was obvi- 
ously in much worse shape than anyone had previously feared. 

So rather than rushing back, traders responded to the IMF's big Reveal by 
promptly yanking out even more money and further attacking Asia's curren- 
cies. Korea was losing $1 billion a day and its debt was downgraded to junk 
bond status. The IMF's "help" had turned crisis into catastrophe. Or, as Jeffrey 
Sachs, now in open warfare with the international financial institutions, put it, 
"Instead of dousing the fire, the IMF in effect screamed fire in the theatre." 55 

The human costs of the IMF's opportunism were nearly as devastating in 
Asia as in Russia. The International Labor Organization estimates that a 
staggering 24 million people lost their jobs in this period and that Indone- 
sia's unemployment rate increased from 4 to 1 2 percent Thailand was losing 
2,000 jobs a day at the height of the "reforms" — 60,000 a month. In South 
Korea, 300,000 workers were fired every month— largely the result of the 
IMF's totally unnecessary demands to slash government budgets and hike 
interest rates. By 1999, South Korea's and Indonesia's unemployment rates 
had nearly tripled in only two years. As in Latin America in the seventies, 
what disappeared in these parts of Asia was what was so remarkable about the 
region's "miracle" in the first place: its large and growing middle class. In 
1996, 63.7 percent of South Koreans identified as middle class; by 1999 that 
number was down to 38.4 percent. According to the World Bank, 20 million 
Asians were thrown into poverty in this period of what Rodolfo Walsh would 
have called "planned misery." 54 

Behind every statistic was a story of wrenching sacrifice and degraded de- 
cisions. As is always the case, women and children suffered the worst of the 


crisis. Many rural families in the Philippines and South Korea sold their 
daughters to human traffickers who took them to work in the sex trade in 
Australia, Europe and North America. In Thailand, public health officials 
reported a 20 percent increase in child prostitution in just one year— the 
year after the IMF reforms. The Philippines tracked the same trend. "It was 
the rich who benefited from the boom, but we the poor pay the price of the 
crisis," said Khun Bunjan, a community leader in northeast Thailand who 
was forced to send her children to work as scavengers after her husband lost 
his factory job. "Even our limited access to schools and health [care] is now 
beginning to disappear." 35 

It was in this context that the U.S. secretary of state, Madeleine Albright, 
visited Thailand in March 1999 and saw fit to scold the Thai public for turn- 
ing to prostitution and the "dead end of drugs." It is "essential that girls not be 
exploited and abused and exposed to AIDS. It's very important to fight back," 
Albright said, filled with moral resolve. She apparently saw no connection be- 
tween the fact that so many Thai girls were being forced into the sex trade 
and the austerity policies for which she expressed her "strong support" on the 
same trip. It was the Asian financial crisis's equivalent of Milton Friedman ex- 
pressing his displeasure with Pinochet's or Deng Xiaoping's human rights vi- 
olations while praising their bold embrace of economic shock therapy. 36 

Feeding Off the Ruins 

The story of Asia's crisis usually ends there— the IMF tried to help; it didn't 
work. Even the IMF's own internal audit came to that conclusion. The 
fund's Independent Evaluation Office concluded that the structural adjust- 
ment demands were "ill-advised" and "broader than seemed necessary" as 
well as "not critical to resolving the crisis." It also warned that "crisis should 
not be used as an opportunity to seek a long agenda of reforms just because 
leverage is high, irrespective of how justifiable they may be on merits."* A 
particularly forceful section of the internal report accused the fund of being 
so blinded by free-market ideology that even considering capital controls was 
institutionally unimaginable. "If it was heresy to suggest that financial mar- 
kets were not distributing world capital in a rational and stable way, then it 
was a mortal sin to contemplate" capital controls. 37 

* For some reason, that highly critical report did not come out until 2003, five years after the 
crisis. By then, it was a little late to be issuing warnings against crisis opportunism; the IMF 
was already structurally adjusting Afghanistan and drawing up plans for Iraq. 


What few were willing to admit at the time is that, while the IMF cer- 
tainly failed the people of Asia, it did not fail Wall Street— far from it. The 
hot money may have been spooked by the IMF's drastic measures, but the 
large investment houses and multinational firms were emboldened. "Of 
course these markets are highly volatile " said Jerome Booth, head of re- 
search at London's Ashmore Investment Management. "That's what makes 
them fun." 38 These fun-seeking firms understood that as a result of the IMF's 
"adjustments," pretty much everything in Asia was now up for sale— and the 
more the market panicked, the more desperate Asian companies would be to 
sell, pushing their prices through the floor. Morgan Stanley's Jay Pelosky had 
said that what Asia needed was "more bad news to continue to put pressure 
on these corporates to sell their companies" — and that's exactly what hap- 
pened, thanks to the IMF. 

Whether the IMF planned the deepening of Asia's crisis or was merely 
recklessly indifferent remains a subject of debate. Perhaps the most charita- 
ble interpretation is that the fund knew it could not lose: if its adjustments 
inflated another bubble in emerging-market stocks, that would be a boon; if 
they sparked more capital flight, it would be a bonanza for vulture capital- 
ists. Either way, the IMF was comfortable enough with the possibility of to- 
tal meltdown to be willing to roll the dice. It's now clear who won the 

Two months after the IMF came to its final agreement with South Korea, 
The Wall Street Journal ran an article headlined "Wall Street Scavenging in 
Asia-Pacific." It reported that Pelosky s firm, as well as several other promi- 
nent houses, had "dispatched armies of bankers to the Asia-Pacific region to 
scout for brokerage firms, asset management firms and even banks that they 
can snap up at bargain prices. The hunt for Asian acquisitions is urgent be- 
cause many U.S. securities firms, led by Merrill Lynch & Co. and Morgan 
Stanley, have made overseas expansion their priority." 39 In short order, sev- 
eral major sales went through: Merrill Lynch bought Japan's Yamaichi Se- 
curities as well as Thailand's largest securities firm, while AIG bought 
Bangkok Investment for a fraction of its worth. JP Morgan bought a stake in 
Kia Motors, while Travelers Group and Salomon Smith Barney bought one 
of Korea's largest textile companies as well as several other companies. Inter- 
estingly, the chair of Salomon Smith Barney's International Advisory Board, 
which was providing advice to the company on mergers and acquisitions in 
this period, was Donald Rumsfeld (appointed in May 1999). Dick Cheney 
was also on the board. Another winner was the Carlyle Group, the secretive 


Washington-based firm known for being the preferred soft landing for ex- 
presidents and ministers, from former secretary of state James Baker, to for- 
mer U.K. prime minister John Major, to Bush Sr., who served as a consultant. 
Carlyle used its top-level connections to snap up Daewoo's telecom division, 
Ssangyong Information and Communication (one of Korea's largest high- 
tech firms), and it became a major shareholder in one of Korea's largest 
banks. 40 

Jeffrey Garten, former U.S. undersecretary of commerce, had predicted 
that when the IMF was finished, "there is going to be a significantly different 
Asia, and it will be an Asia in which American firms have achieved much 
deeper penetration, much greater access." 41 He wasn't kidding. Within two 
years, the face of much of Asia was utterly transformed, with hundreds of lo- 
cal brands replaced by multinational giants. It was dubbed "the world's 
biggest going-out-of-business sale," by The New York Times, and a "business- 
buying bazaar" by Business Week. 42 In fact, it was a preview of the kind of dis- 
aster capitalism that would become the market norm after September 1 1: a 
terrible tragedy was exploited to allow foreign firms to storm Asia. They were 
there not to build their own businesses and compete but to snap up the en- 
tire apparatus, workforce, customer base and brand value built over decades 
by Korean companies, often to break them apart, downsize them or shut 
them completely in order to eliminate competition for their imports. 

The Korean titan Samsung, for instance, was broken up and sold for 
parts: Volvo got its heavy industry division, SC Johnson & Son its pharma- 
ceutical arm, General Electric its lighting division. A few years later, Dae- 
woo's once-mighty car division, which the company had valued at $6 billion, 
was sold off to GM for just $400 million— a steal worthy of Russia's shock 
therapy. But this time, unlike what happened in Russia, local firms were get- 
ting wiped out by the multinationals. 43 

Other big players who got a piece of the Asian distress sale included Sea- 
gram's, Hewlett-Packard, Nestle, Interbrew and Novartis, Carrefour, Tesco and 
Ericsson. Coca-Cola bought a Korean bottling company for half a billion dol- 
lars; Procter and Gamble bought a Korean packaging company; Nissan 
bought one of Indonesia's largest car companies. General Electric acquired a 
controlling stake in Korea's refrigerator manufacturer LG; and Britain's Power- 
gen nabbed LG Energy, a large Korean electricity-and-gas company. Accord- 
ing to BusinessWeek, the Saudi prince Alwaleed bin Talal was "jetting across 
Asia in his cream-colored Boeing 727, collecting bargains"— including a stake 
in Daewoo. 44 


Fittingly, Morgan Stanley, which had been the loudest in calling for a 
deepening of the crisis, inserted itself into many of these deals, collecting 
huge commissions. It acted as Daewoo's adviser on the sale of its automotive 
division and on brokering the privatization of several South Korean banks. 45 

It wasn't only private Asian firms that were being sold to foreigners. Like 
earlier crises in Latin America and Eastern Europe, this one also forced gov- 
ernments to sell public services to raise badly needed capital. The U.S. govern- 
ment eagerly anticipated this effect early on. In arguing why Congress 
should authorize billions to the IMF for the Asia makeover, the U.S. trade 
representative Charlene Barshefsky offered assurances that the agreements 
would "create new business opportunities for US firms": Asia would be 
forced to "accelerate privatization of certain key sectors— including energy, 
transportation, utilities and communications." 46 

Sure enough, the crisis set off a wave of privatizations, and foreign multi- 
nationals cleaned up. Bechtel got the contract to privatize the water and 
sewage systems in eastern Manila, as well as one to build an oil refinery in 
Sulawesi, Indonesia. Motorola got full control over Korea's Appeal Telecom. 
The New York-based energy giant Sithe got a large stake in Thailand's pub- 
lic gas company, the Cogeneration. Indonesia's water systems were split be- 
tween Britain's Thames Water and France's Lyonnaise des Eaux. Canada's 
Westcoast Energy snapped up a huge Indonesian power plant project. 
British Telecom purchased a large stake in both Malaysia's and Korea's 
postal services. Bell Canada got a piece of Korea's telecom Hansol 47 

All told, there were 186 major mergers and acquisitions of firms in In- 
donesia, Thailand, South Korea, Malaysia and the Philippines by foreign 
multinationals in a span of only twenty months. Watching this sale unfold, 
Robert Wade, an LSE economist, and Frank Veneroso, an economic consul- 
tant, predicted that the IMF program "may even precipitate the biggest 
peacetime transfer of assets from domestic to foreign owners in the past fifty 
years anywhere in the world." 48 

The IMF, while admitting some errors in its early responses to the crisis, 
claims that it quickly corrected them and that the "stabilization" programs 
were successful. It's true that Asia's markets eventually calmed down, but at a 
tremendous and ongoing cost. Milton Friedman, at the height of the crisis, 
had cautioned against panic, insisting that "it will be over. ... As they get 
this financial mess settled, you can see a return to growth in Asia, but 
whether it will be one year, two years, three years, nobody can tell you." 49 



The truth is that Asia's crisis is still not over, a decade later. When 24 mil- 
lion people lose their jobs in a span of two years, a new desperation takes 
root that no culture can easily absorb. It expresses itself in different forms 
across the region, from a significant rise in religious extremism in Indonesia 
and Thailand to the explosive growth in the child sex trade. 

Employment rates have still not reached pre- 1997 levels in Indonesia, 
Malaysia and South Korea. And it's not just that workers who lost their jobs 
during the crisis never got them back. The layoffs have continued, with new 
foreign owners demanding ever-higher profits for their investments. The sui- 
cides have also continued: in South Korea, suicide is now the fourth most 
common cause of death, more than double the pre-crisis rate, with thirty- 
eight people taking their own lives every day. 50 

That is the untold story of the policies that the IMF calls "stabilization 
programs," as if countries were ships being tossed around on the market's 
high seas. They do, eventually, stabilize, but that new equilibrium is 
achieved by throwing millions of people overboard: public sector workers, 
small-business owners, subsistence farmers, trade unionists. The ugly secret 
of "stabilization" is that the vast majority never climb back aboard. They 
end up in slums, now home to 1 billion people; they end up in brothels or 
in cargo ship containers. They are the disinherited, those described by the 
German poet Rainer Maria Rilke as "ones to whom neither the past nor the 
future belongs." 51 

These people weren't the only victims of the IMF's demand for perfect or- 
thodoxy in Asia. In Indonesia, the anti-Chinese sentiment I witnessed in the 
summer of 1997 continued to build, stoked by a political class happy to de- 
flect attention away from itself. It got much worse after Suharto raised the 
price of basic survival items. Riots broke out across the country, and many of 
them targeted the Chinese minority; approximately twelve hundred people 
were killed, and dozens of Chinese women were gang-raped. 52 They too 
should be counted among the victims of Chicago School ideology. 

Anger in Indonesia did, finally, direct itself at Suharto and the presiden- 
tial palace. For three decades, Indonesians had been kept more or less in 
line by the memory of the bloodbath that brought Suharto to power, a mem- 
ory that was refreshed by periodic massacres in the provinces and in East 
Timor. Anti-Suharto rage had burned under the surface all this time, but it 
took the IMF to pour the gasoline — which it did, ironically, by demanding 


that he raise the price of gasoline. After that, Indonesians rose up and pushed 
Suharto from power. 

Like a prison interrogator, the IMF used the extreme pain of the crisis to 
break the Asian Tigers' will, to reduce the countries to total compliance. But 
the CIA's interrogation manuals warn that this process can go too far— apply 
too much direct pain and, instead of regression and compliance, the inter- 
rogators face confidence and defiance. In Indonesia that line was crossed, a 
reminder that it is possible to take shock therapy too far, provoking a kind of 
blowback that was about to become very familiar, from Bolivia to Iraq. 

Free-market crusaders are, however, slow learners when it comes to the 
unintended consequences of their policies. The only lesson learned from the 
enormously lucrative Asian sell-off appears to have been yet more confirma- 
tion for the shock doctrine, more evidence (as if any more was needed) that 
there is nothing like a true disaster, a genuine churning of society, to open 
up a new frontier. A few years after the peak of the crisis, several prominent 
commentators were even willing to go so far as to say that what happened in 
Asia, despite all the devastation, was a blessing in disguise. The Economist 
noted that "it took a national crisis for South Korea to turn from an inward- 
looking nation to one that embraced foreign capital, change and competi- 
tion." And Thomas Friedman, in his best-selling book The Lexus and the 
Olive Tree, declared that what happened in Asia wasn't a crisis at all. "I be- 
lieve globalization did us all a favor by melting down the economies of Thai- 
land, Korea, Malaysia, Indonesia, Mexico, Russia, and Brazil in the 1990s, 
because it laid bare a lot of rotten practices and institutions," he wrote, 
adding that "exposing the crony capitalism in Korea was no crisis in my 
book." 53 In his New York Times columns supporting the invasion of Iraq, a 
similar logic would be on display, except that the melting down would be 
done with cruise missiles, not currency trades. 

The Asian crisis certainly showed how well disaster exploitation worked. 
At the same time, the destructiveness of the market crash and the cynicism 
of the West's response sparked powerful countermovements. 

The forces of multinational capital got their way in Asia, but they pro- 
voked new levels of public rage, with the rage eventually directed squarely at 
the institutions advancing the ideology of unfettered capitalism. As an un- 
usually balanced Financial Times editorial put it, Asia was a "warning signal 
that public unease with capitalism and the forces of globalization is reaching 
a worrying level. The Asian crisis showed the world how even the most 
successful countries could be brought to their knees by a sudden outflow of 



capital. People were outraged at how the whims of secretive hedge funds 
could apparently cause mass poverty on the other side of the world." 54 

Unlike in the former Soviet Union, where the planned misery of shock 
therapy could be passed off as part of the "painful transition" from Commu- 
nism to market democracy, Asia's crisis was plainly a creation of the global 
markets. Yet when the high priests of globalization sent missions to the disas- 
ter zone, all they wanted to do was deepen the pain. 

The result was that these missions lost the comfortable anonymity they 
had enjoyed previously. The IMF's Stanley Fischer recalled the "circus at- 
mosphere" around the Seoul Hilton when he visited South Korea at the start 
of the negotiations. "I got imprisoned in my hotel room — couldn't move out 
because [if] I opened the door, there were 10,000 photographers." According 
to another account, in order to reach the banquet room where the negotia- 
tions were taking place, IMF representatives were forced "to take a circuitous 
route to a back entrance that involved going up and down flights of stairs and 
through the Hilton's vast kitchen." 55 At the time, IMF officials were unac- 
customed to such attention. The experience of being prisoners in five-star 
hotels and conference centers would become familiar for emissaries of the 
Washington Consensus in the years to come, as mass protests started to greet 
their gatherings around the world. 

After 1998, it became increasingly difficult to impose the shock therapy- 
style makeovers by peaceful means— through the usual IMF bullying or 
arm-twisting at trade summits. The defiant new mood coming from the 
South made its global debut when the World Trade Organization talks col- 
lapsed in Seattle in 1999. Though the college-age protesters received the 
bulk of the media coverage, the real rebellion took place inside the confer- 
ence center, when developing countries formed a voting bloc and rejected 
demands for deeper trade concessions as long as Europe and the U.S. con- 
tinued to subsidize and protect their domestic industries. 

At the time, it was still possible to dismiss the Seattle breakdown as a mi- 
nor pause in the steady advance of corporatism. Within a few years, however, 
the depth of the shift would be undeniable: the U.S. government's ambitious 
dream of creating a unified free-trade zone encompassing all of Asia-Pacific 
was abandoned, as were a global investors' treaty and plans for a Free Trade 
Area of the Americas, stretching from Alaska to Chile. 

Perhaps the greatest impact of the so-called antiglobalization movement 
was that it forced the Chicago School ideology into the dead center of the in- 
ternational debate. For a brief moment at the turn of the millennium, there 


was no pressing crisis to deflect attention — the debt shocks had faded, the 
"transitions" were complete, and a new global war had not yet arrived. What 
was left was the real world track record of the free-market crusade: the dismal 
reality of inequality, corruption and environmental degradation left behind 
when government after government embraced Friedman's advice, given to 
Pinochet all those years ago, that it was a mistake to try "to do good with 
other people's money." 

In retrospect, it is striking that capitalism's monopoly period, when it no 
longer had to deal with competing ideas or counterpowers, was extremely 
brief— only eight years, from the collapse of the Soviet Union in 1991 to the 
collapse of the WTO talks in 1999. But rising opposition would not slow the 
determination to advance this extraordinarily profitable agenda; its advo- 
cates would simply ride the waves of fear and disorientation created by big- 
ger shocks than ever before. 




Creative destruction is our middle name, both within 
our own society and abroad. We tear down the old order 
every day, from business to science. Literature, art, 
architecture, and cinema to politics and the law. . . . 
They must attack us in order to survive, just as we must 
destroy them to advance our historic mission. 

— Michael Ledeen, The War against the Terror Masters, 

George's answer to any problem at the ranch is to cut it 
down with a chain saw— which I think is why he and 
Cheney and Rumsfeld get along so well. 

— Laura Bush, White House Correspondents' Association 
Dinner, April 30, 2005 




He's a ruthless little bastard. You can be sure of that. 

—Richard Nixon, U.S. president, referring to Donald Rumsfeld, 
1971 1 

Today I fear that we are in fact waking up to a surveillance society 
that is already all around us. 

—Richard Thomas, U.K. information commissioner, November 
2006 2 

Homeland security may have just reached the stage that Internet 
investing hit in 1997. Back then, all you needed to do was put an 
"e" in front of your company name and your IPO would rocket. 
Now you can do the same with "fortress." 

—Daniel Gross, Slate, June 2005 3 

It was a muggy Monday in Washington, and Donald Rumsfeld was about to do 
something he hated: talk to his staff. Since taking office as defense secretary, he 
had solidified his reputation among the Joint Chiefs of Staff as high-handed, 
secretive and— a word that kept coming up— arrogant. Their animosity was 
understandable. Since setting foot in the Pentagon, Rumsfeld had brushed 
aside the prescribed role of leader and motivator and acted instead like a blood- 
less hatchet man— a CEO secretary on a downsizing mission. 

When Rumsfeld accepted the post, many wondered why he would even 
want it. He was sixty-eight years old, had five grandchildren and a personal 


fortune estimated at as much as $250 million— and he had already held the 
same post in the Gerald Ford administration. 4 Rumsfeld, however, had no 
desire to be a traditional defense secretary, defined by the wars waged on his 
watch; he had greater ambitions than that. 

The incoming defense secretary had spent the past twenty-odd years 
heading up multinational corporations and sitting on their boards, often 
leading companies through dramatic mergers and acquisitions, as well as 
painful restructurings. In the nineties, he had come to see himself as a man 
of the New Economy, directing a company specializing in digital TV, sitting 
on the board of another promising "e-business solutions," and serving as 
board chairman of the very sci-fi biotech firm that held the exclusive patent 
on a treatment for avian flu as well as on several important AIDS medica- 
tions. 5 When Rumsfeld joined the cabinet of George W. Bush in 2001, it was 
with a personal mission to reinvent warfare for the twenty-first century— 
turning it into something more psychological than physical, more spectacle 
than struggle, and far more profitable than it had ever been before. 

Much has been written about Rumsfeld's controversial "transformation" 
project, which prompted eight retired generals to call for his resignation and 
eventually forced him to step down after the 2006 midterm elections. When 
Bush announced the resignation he described the "sweeping transforma- 
tion" project— and not the war in Iraq or the broader "War on Terror"— as 
Rumsfeld's most profound contribution: "Don's work in these areas did not 
often make the headlines. But the reforms that set in motion— that he has set 
in motion— are historic." 6 They are indeed, but it has not always been clear 
what those reforms consist of. 

Senior military officials derided "transformation" as "empty buzz words," 
and Rumsfeld often seemed determined (almost comically) to prove the crit- 
ics right: "The Army is going through what is a major modernization," 
Rumsfeld said in April 2006. "It's moving from a division-oriented force to a 
modular brigade combat team force . . . from service-centric war-fighting to 
deconfliction war-fighting to interoperability and now toward interdepen- 
dence. That's a hard thing to do." 7 But the project was never quite as com- 
plicated as Rumsfeld made it sound. Beneath the jargon, it was simply an 
attempt to bring the revolution in outsourcing and branding that he had 
been part of in the corporate world into the heart of the U.S. military. 

During the 1990s, many companies that had traditionally manufactured 
their own products and maintained large, stable workforces embraced what 


became known as the Nike model: don't own any factories, produce your 
products through an intricate web of contractors and subcontractors, and pour 
your resources into design and marketing. Other companies opted for the al- 
ternative, Microsoft model: maintain a tight control center of shareholder/em- 
ployees who perform the company's "core competency" and outsource 
everything else to temps, from running the mailroom to writing code. Some 
called the companies that underwent these radical restructurings "hollow cor- 
porations" because they were mostly form, with little tangible content left over. 

Rumsfeld was convinced that the U.S. Department of Defense needed an 
equivalent makeover; as Fortune said when he arrived at the Pentagon, 
"Mr. CEO" was "about to oversee the same sort of restructuring that he or- 
chestrated so well in the corporate world." 8 There were, of course, some 
necessary differences. Where corporations unburdened themselves of 
geography-bound factories and full-time workers, Rumsfeld saw the army 
shedding large numbers of full-time troops in favor of a small core of staffers 
propped up by cheaper temporary soldiers from the Reserve and National 
Guard. Meanwhile, contractors from companies such as Blackwater and 
Halliburton would perform duties ranging from high-risk chauffeuring to 
prisoner interrogation to catering to health care. And where corporations 
poured their savings on labor into design and marketing, Rumsfeld would 
spend his savings from fewer troops and tanks on the latest satellite and nano- 
technology from the private sector. "In the twenty-first century," Rumsfeld 
said of the modern military, "we re going to have to stop thinking about 
things, numbers of things, and mass, and think also and maybe even first 
about speed and agility and precision." He sounded very much like the hy- 
peractive management consultant Tom Peters, who declared in the late 
nineties that companies had to decide if they were "pure 'players' in brain- 
ware" or "lumpy-object purveyors." 9 

Not surprisingly, the generals who were used to holding sway in the Pen- 
tagon were pretty sure that "things" and "mass" still mattered when it came 
to fighting wars. They soon became deeply hostile to Rumsfeld's vision of a 
hollow military. After a little more than seven months in office, the secretary 
had already stepped on so many powerful toes that it was rumored his days 
were numbered. 

It was at this moment that Rumsfeld called a rare "town hall meeting" 
for Pentagon staff. The speculation began immediately: Was he going to 
announce his resignation? Was he going to try his hand at a pep talk? Was he 


belatedly trying to sell the old guard on transformation? As hundreds of Pen- 
tagon senior staff filed into the auditorium that Monday morning, "the mood 
was definitely one of curiosity," one staffer told me. "The feeling was, How 
are you going to convince us? Because there was already a huge amount of 
animosity toward him." 

When Rumsfeld made his entrance, "we politely stood up and sat down." 
It rapidly became clear that this was not a resignation, and it most certainly 
was not a pep talk. It may have been the most extraordinary speech ever 
given by a U.S. secretary of defense. It began like this: 

The topic today is an adversary that poses a threat, a serious threat, to 
the security of the United States of America. This adversary is one of 
the world's last bastions of central planning. It governs by dictating 
five-year plans. From a single capital, it attempts to impose its de- 
mands across time zones, continents, oceans and beyond. With bru- 
tal consistency, it stifles free thought and crushes new ideas. It 
disrupts the defense of the United States and places the lives of men 
and women in uniform at risk. 

Perhaps this adversary sounds like the former Soviet Union, but 
that enemy is gone: our foes are more subtle and implacable today. . . . 
The adversary's closer to home. It's the Pentagon bureaucracy. 10 

As Rumsfeld's rhetorical gimmick revealed itself, the faces in the audience 
went stony. Most of the people listening had devoted their careers to fighting 
the Soviet Union and didn't appreciate being compared to Commies at this 
stage in the game. Rumsfeld wasn't finished. "We know the adversary. We 
know the threat. And with the same firmness of purpose that any effort 
against a determined adversary demands, we must get at it and stay at it . . . 
today we declare war on bureaucracy." 

He'd done it: the defense secretary had not only described the Pentagon 
as a grave threat to America but declared war against the institution where he 
worked. The audience was stunned. "He was saying we were the enemy, that 
the enemy was us. And here we were thinking we were doing the nation's 
business," the staffer told me. 

It wasn't that Rumsfeld wanted to save taxpayer dollars— he had just asked 
Congress for an 1 1 percent budget increase. But following the corporatist 
principles of the counterrevolution, in which Big Government joins forces 
with Big Business to redistribute funds upward, he wanted less spent on staff 



and far more public money transferred directly into the coffers of private 
companies. And with that, Rumsfeld launched his "war." Every department 
needed to slash its staff by 15 percent, including "every base headquarters 
building in the world. It's not just the law, it's a good idea, and we're going to 
get it done." 11 

He had already directed his senior staff to "scour the Department [of De- 
fense] for functions that could be performed better and more cheaply through 
commercial outsourcing." He wanted to know, "Why is DoD one of the last or- 
ganizations around that still cuts its own checks? When an entire industry ex- 
ists to run warehouses efficiently, why do we own and operate so many of our 
own? At bases around the world, why do we pick up our own garbage and mop 
our own floors, rather than contracting services out, as many businesses do? 
And surely we can outsource more computer systems support" 

He even went after the sacred cow of the military establishment: health 
care for soldiers. Why were there so many doctors? Rumsfeld wanted to 
know. "Some of those needs, especially where they may involve general 
practice or specialties unrelated to combat, might be more efficiently de- 
livered by the private sector." And how about the houses for soldiers and 
their families — surely these could be done through "public-private part- 

The Defense Department should focus on its core competency: 
"warfighting . . . But in all other cases, we should seek suppliers who can 
provide these non-core activities efficiently and effectively." 

After the speech, plenty of Pentagon staffers griped that the only thing 
standing in the way of Rumsfeld's bold vision of outsourcing the army was 
the small matter of the U.S. Constitution, which clearly defined national se- 
curity as the duty of government, not private companies. "I thought the 
speech was going to cost Rumsfeld his job," my source told me. 

It didn't, and the coverage of his declaration of war on the Pentagon was 
sparse. That's because the date of his contentious address was September 
10, 2001. 

It is a strange historical footnote that CNN Evening News on September 
10 carried a short story under the headline "Defense Secretary Declares War 
on the Pentagon's Bureaucracy" and that, the next morning, the network 
would report on an attack on that institution of a distinctly less metaphorical 
kind, one that killed 125 Pentagon employees and seriously wounded an- 
other 1 10 of the people whom Rumsfeld had portrayed as enemies of the 
state less than twenty-four hours earlier. 12 


Cheney and Rumsfeld: Proto-Disaster Capitalists 

The idea at the heart of Rumsfeld's forgotten speech is nothing less than the 
central tenet of the Bush regime: that the job of government is not to govern 
but to subcontract the task to the more efficient and generally superior pri- 
vate sector. As Rumsfeld made clear, this task was about nothing as prosaic 
as trimming the budget, but was, for its advocates, a world-changing crusade 
on a par with defeating Communism. 

By the time the Bush team took office, the privatization mania of the 
eighties and nineties (fully embraced by the Clinton administration, as well 
as state and local governments) had successfully sold off or outsourced the 
large, publicly owned companies in several sectors, from water and electric- 
ity to highway management and garbage collection. After these limbs of the 
state had been lopped off, what was left was "the core"— those functions so 
intrinsic to the concept of governing that the idea of handing them to private 
corporations challenged what it meant to be a nation-state: the military, po- 
lice, fire departments, prisons, border control, covert intelligence, disease 
control, the public school system and the administering of government bu- 
reaucracies. The earlier stages of the privatization wave had been so prof- 
itable, however, that many of the companies that had devoured the 
appendages of the state were greedily eyeing these essential functions as the 
next source of instant riches. 

By the late nineties, a powerful move was afoot to break the taboos pro- 
tecting "the core" from privatization. It was, in many ways, merely a logical 
extension of the status quo. Just as Russia's oil fields, Latin America's tele- 
corns, and Asia's industry had supplied the stock market with superprofits in 
the nineties, now it would be the U.S. government itself that would play that 
central economic role— all the more crucial because the backlash against 
privatization and free trade was spreading rapidly through the developing 
world, closing off other avenues for growth. 

It was a move that brought the shock doctrine to a new, self-referential 
phase: until that point, disasters and crises had been harnessed to push 
through radical privatization plans after the fact, but the institutions that had 
the power both to create and respond to cataclysmic events— the military, the 
CIA, the Red Cross, the UN, emergency "first responders"— had been some 
of the last bastions of public control. Now, with the core set to be devoured, 
the crisis-exploiting methods that had been honed over the previous three 
decades would be used to leverage the privatization of the infrastructure of 



disaster creation and disaster response. Friedman's crisis theory was going 

At the vanguard of the push to create what can only be described as a 
privatized police state were the most powerful figures in the future Bush 
administration: Dick Cheney, Donald Rumsfeld and George W. Bush 

For Rumsfeld, the idea of applying "market logic" to the U.S. military was 
a project that dated back four decades. It began in the early sixties, when he 
used to attend seminars at the University of Chicago's Economics Depart- 
ment. He had developed a particularly close connection with Milton Fried- 
man, who, after Rumsfeld was elected to Congress at the age of thirty, took 
the precocious Republican under his wing, helping him to develop a bold 
free-market policy platform and tutoring him in economic theory. The two 
men remained close over the years, with Rumsfeld attending an annual 
birthday celebration for Friedman, organized every year by the Heritage 
Foundation's president, Ed Feulner. "There is something about Milton that 
when I am around him, and talking to him, I feel smarter," Rumsfeld said of 
his mentor when Friedman turned ninety. 13 

The admiration was mutual. Friedman was so impressed with Rumsfeld's 
commitment to deregulated markets that he aggressively lobbied Reagan to 
name Rumsfeld as his running mate in the 1980 election instead of George 
H. W. Bush— and he never did quite forgive Reagan for disregarding his ad- 
vice. "I believe that Reagan made a mistake when he chose Bush as his vice- 
presidential candidate," Friedman wrote in his memoirs; "indeed, I regard it 
as the worst decision not only of his campaign but of his presidency. My fa- 
vorite candidate was Donald Rumsfeld. Had he been chosen, I believe he 
would have succeeded Reagan as president, and the sorry Bush-Clinton 
period would never have occurred." 14 

Rumsfeld survived being passed over as Reagan's running mate by throw- 
ing himself into his burgeoning business career. As CEO of the international 
drug and chemical company Searle Pharmaceuticals, he used his political 
connections to secure the controversial and extraordinarily lucrative Food 
and Drug Administration (FDA) approval for aspartame (marketed as Nu- 
traSweet); and when Rumsfeld brokered the deal to sell Searle to Monsanto, 
he personally earned an estimated $12 million. 15 

The high-stakes sale established Rumsfeld as a corporate power player, 
landing him seats on the boards of such blue-chip firms as Sears and Kel- 
logg's. His status as a former defense secretary, meanwhile, made him a score 


for any company that was part of what Eisenhower had called the "military- 
industrial complex." Rumsfeld sat on the board of the aircraft manufacturer 
Gulfstream and was also paid $190,000 a year as a board member of ASEA 
Brown Boveri (ABB), the Swiss engineering giant that gained unwanted at- 
tention when it was revealed to have sold nuclear technology to North Ko- 
rea, including the capacity to produce plutonium. The nuclear reactor sale 
went through in 2000, and at the time Rumsfeld was the only North Ameri- 
can on the ABB board. He claims to have no memory of the reactor sale 
coming before the board, though the company insists that "board members 
were informed about the project." 16 

It was in 1997, when Rumsfeld was named chairman of the board of the 
biotech firm Gilead Sciences, that he would firmly establish himself as a 
proto disaster capitalist. The company had registered the patent for Tamiflu, 
a treatment for many kinds of influenza and the preferred drug for avian 
flu.* If there was ever an outbreak of the highly contagious virus (or the 
threat of one), governments would be forced to buy billions of dollars' worth 
of the treatment from Gilead Sciences. 

The patenting of drugs and vaccines to treat public health emergencies 
remains a controversial subject. The U.S. has been epidemic-free for several 
decades, but when the polio outbreak was at its peak in the mid-fifties, the 
ethics of disease profiteering were hotly debated. With close to sixty thou- 
sand known cases of polio, and parents terrified that their children were go- 
ing to contract the crippling, often fatal, disease, the search for a cure was 
frantic. When Jonas Salk, a scientist at the University of Pittsburgh, found it 
and developed the first polio vaccine in 1952, he did not patent the lifesaving 
treatment. "There is no patent," Salk told the broadcaster Edward R. Mur- 
row: "Could you patent the sun?" 17 

It's safe to say that if you could patent the sun, Donald Rumsfeld would 
have long since put in an application with the U.S. Patent and Trademark Of- 
fice. His former company Gilead Sciences, which also owns the patents on 
four AIDS treatments, spends a great deal of energy trying to block the distri- 
bution of cheaper generic versions of its lifesaving drugs in the developing 

* Tamiflu has become highly controversial. In a growing number of reported cases, young 
people who took the drug became confused, paranoid, delusional and suicidal. Between No- 
vember 2005 and November 2006, twenty-five deaths around the world were linked to Tami- 
flu, and in the United States the drug is now issued with a health warning alerting patients to 
an "increased risk of self-injury and confusion" and urging them to "be closely monitored for 
signs of unusual behavior." 


world. It has been targeted for these activities by public health activists in the 
U.S., who point out that some of Gilead's key medicines were developed on 
grants funded by taxpayers. 18 Gilead, for its part, sees epidemics as a growth 
market, and it has an aggressive marketing campaign to encourage businesses 
and individuals to stockpile Tamiflu, just in case. Before he reentered govern- 
ment, Rumsfeld was so convinced that he was on to a hot new industry that 
he helped found several private investment funds specializing in biotechnol- 
ogy and pharmaceuticals. 19 These companies are banking on an apocalyptic 
future of rampant disease, one in which governments are forced to buy, at top 
dollar, whatever lifesaving products the private sector has under patent. 

Dick Cheney, a protege of Rumsfeld's in the Ford administration, has also 
built a fortune based on the profitable prospect of a grim future, though 
where Rumsfeld saw a boom market in plagues, Cheney was banking on a 
future of war. As secretary of defense under Bush Sr., Cheney scaled down 
the number of active troops and dramatically increased reliance on private 
contractors. He contracted Brown & Root, the engineering division of the 
Houston-based multinational Halliburton, to identify tasks being performed 
by U.S. troops that could be taken over by the private sector for a profit. Not 
surprisingly, Halliburton identified all kinds of jobs that the private sector 
could perform, and those findings led to a bold new Pentagon contract: the 
Logistics Civil Augmentation Program, or LOGCAP. The Pentagon was no- 
torious for its multi-billion-dollar contracts with weapons manufacturers, but 
this was something new: not supplying the military with gear but serving as 
manager for its operations. 20 

A select group of companies was invited to apply to provide unlimited 
"logistical support" for U.S. military missions, an extremely vague work de- 
scription. Furthermore, no dollar value was attached to the contract: the 
winning company was simply assured that whatever it did for the military, it 
would have its costs covered by the Pentagon, plus a guaranteed profit— 
what is known as a "cost plus" contract. These were the final days of the 
Bush Sr. administration, and the company that won the contract in 1992 
was none other than Halliburton. As the Los Angeles Times s T. Christian 
Miller noted, Halliburton "beat out thirty-six other bidders to win a five-year 
contract— not surprising perhaps, given that it was the company that drew 
up the plans." 

In 1995, with Clinton in the White House, Halliburton recruited Cheney 
as its new boss. While the Halliburton division Brown & Root had a long his- 
tory as a U.S. military contractor, under Cheney's leadership Halliburton's 


role was to expand so dramatically that it would transform the nature of 
modern war. Thanks to the loosely worded contract that Halliburton and 
Cheney had crafted when he was at the Pentagon, the company was able to 
stretch and expand the meaning of the term "logistical support" until Hal- 
liburton was responsible for creating the entire infrastructure of a U.S. mili- 
tary operation overseas. All that was required of the army was to provide the 
soldiers and the weapons— they were, in a way, content providers, while Hal- 
liburton ran the show. 

The result, first on display in the Balkans, was a kind of McMilitary expe- 
rience in which deploying abroad resembled a heavily armed and perilous 
package vacation. "The first person to greet our soldiers as they arrive in the 
Balkans and the last one to wave goodbye is one of our employees," a Hal- 
liburton spokesperson explained, making the company's staff sound more like 
cruise directors than army logistics coordinators. 21 That was the Halliburton 
difference: Cheney saw no reason why war shouldn't be a thriving part of 
America's highly profitable service economy— invasion with a smile. 

In the Balkans, where Clinton deployed nineteen thousand soldiers, U.S. 
bases sprang up as mini Halliburton cities: neat, gated suburbs, built and run 
entirely by the company. And Halliburton was committed to providing the 
troops with all the comforts of home, including fast-food outlets, supermar- 
kets, movie theaters and high-tech gyms. 22 Some senior officers wondered 
what the strip-mailing of the military would do to troop discipline— but they 
too were enjoying the perks. "Everything with Halliburton was gold-plated," 
one told me. "So we weren't complaining." As far as Halliburton was con- 
cerned, keeping the customer satisfied was good business — it guaranteed 
more contracts, and because profits were calculated as a percentage of costs, 
the higher the costs, the higher the profits. "Don't worry, it's cost plus," was a 
saying made famous in Baghdad's Green Zone, but the deluxe war spending 
was pioneered during the Clinton era. In just five years at Halliburton, Che- 
ney almost doubled the amount of money the company extracted from the 
U.S. Treasury, from $1.2 billion to $2.3 billion, while the amount it received 
in federal loans and loan guarantees increased fifteenfold. 23 And he was well 
rewarded for his efforts. Before taking office as vice president, Cheney "val- 
ued his net worth at between $18 million and $81.9 million, including be- 
tween $6 million and $30 million worth of stock in Halliburton Co. . . . 
Overall, Cheney was given some 1,260,000 Halliburton options, with 
100,000 already used, 760,000 eligible to be redeemed and 166,667 to be- 
come valid this December [2000]. " 24 



The push to expand the service economy into the heart of government 
was, for Cheney, a family affair. In the late nineties, while he was turning 
military bases into Halliburton suburbs, his wife, Lynne, was earning stock 
options in addition to her salary as a board member at Lockheed Martin, the 
world's largest defense contractor. Lynne s time on the board, from 1995 to 
2001, coincided with a key period of transition for companies like Lock- 
heed. 25 The Cold War was over, defense spending was dropping, and with 
nearly their entire budgets coming from government weapons contracts, 
these firms needed a new business model. At Lockheed and its fellow arms 
manufacturers, a strategy emerged to aggressively pursue a new line of work: 
running the government for a fee. 

In the mid-nineties, Lockheed began taking over information technology 
divisions of the U.S. government, running its computer systems and a great 
deal of its data management. Largely under the public radar, the company 
went so far in this direction that, in 2004, The New York Times reported, 
"Lockheed Martin doesn't run the United States. But it does help run a 
breathtakingly big part of it. . . . It sorts your mail and totals your taxes. It 
cuts Social Security checks and counts the United States census. It runs 
space flights and monitors air traffic. To make all that happen, Lockheed 
writes more computer code than Microsoft.* 26 

It made for a powerful husband-and-wife team. While Dick was steering 
Halliburton to take over the infrastructure of warfare abroad, Lynne was 
helping Lockheed to take over the day-to-day running of government at 
home. At times husband and wife found themselves in direct competition. 
In 1996, when the state of Texas announced that corporations could bid to 
run its welfare program — a contract worth up to $2 billion over five years — 
both Lockheed and the IT giant Electronic Data Systems, which boasted 
Dick Cheney as a board member, bid on the contract. In the end, the Clin- 
ton administration intervened and halted the auction. Though it was gener- 
ally an enthusiastic supporter of outsourcing, deciding who was eligible to 
receive welfare was determined to be an essential role of government, not 
suitable for privatization. Both Lockheed and EDS cried foul, as did the 

* All the Large weapons makers got into the business of running government in this period. 
Computer Sciences, which provides information technologies to the military, including bio- 
metric IDs, won a $644 million contract from the county of San Diego to run a LL its informa- 
tion technology— one of the Largest contracts of its kind ever awarded. The county became 
dissatisfied with Computer Sciences' performance and did not renew the contract, only to 
give it to yet another weapons giant, Northrop Grumman, maker of the B-2 stealth bomber. 


governor of Texas, George W. Bush, who thought privatizing the welfare sys- 
tem was a terrific idea. 27 

George W. Bush didn't distinguish himself as governor in too many 
ways, but there was one area in which he excelled: parceling out to private 
interests the various functions of the government he was elected to run — 
especially security-related functions, a preview of the privatized War on 
Terror he would soon unleash. Under his watch, the number of private 
prisons in Texas grew from twenty-six to forty-two, prompting The Ameri- 
can Prospect magazine to call Bush's Texas "the world capital of the 
private-prison industry." In 1997, the FBI launched an investigation into a 
jail in Brazoria County, forty miles outside Houston, after a local television 
station aired a videotape of guards kicking unresisting inmates in the 
groin, shooting them with stun guns and attacking them with dogs. At least 
one of the violent guards in the video was wearing the uniform of Capital 
Correctional Resources, a private company contracted to supply guards for 
the prison. 28 

Bush's enthusiasm for privatization was in no way dampened by the Bra- 
zoria incident. A few weeks later, he had what appears to have been an 
epiphany when he met Jose Pinera, the Chilean minister who had privatized 
social security during the Pinochet dictatorship. This is Pinera 's description 
of the meeting: "By his concentrated focus, his body language [and] his rel- 
evant questions, I knew immediately that Mr. Bush had fully understood the 
essence of my idea: that Social Security reform could be used both to pro- 
vide a decent retirement and to create a world of worker-capitalists, an own- 
ership society. ... He was so enthusiastic that at the end he whispered in my 
ear with a smile, 'Go and tell all this to my little brother in Florida. He will 
also love it.' " 29 

The future president's commitment to auctioning off the state, combined 
with Cheney's leadership in outsourcing the military and Rumsfeld's patent- 
ing of drugs that might prevent epidemics, provided a preview of the kind of 
state the three men would construct together— it was a vision of a perfectly 
hollow government. Though this radical program did not form the center- 
piece of Bush's campaign for the presidency in 2000, there were hints of 
what was in store: "There are hundreds of thousands of full-time federal em- 
ployees that are performing tasks that could be done by companies in the 
private sector," Bush said in one campaign speech. "I will put as many of 
these tasks as possible up for competitive bidding. If the private sector can do 
a better job, the private sector should get the contract." 30 



September 1 1 and the Civil Service Comeback 

As Bush and his cabinet took their posts in January 2001, the need for new 
sources of growth for U.S. corporations took on even greater urgency. With 
the tech bubble now officially popped and the Dow Jones tumbling 824 
points in their first two and half months in office, they found themselves star- 
ing in the face of a serious economic downturn. Keynes had argued that gov- 
ernments should spend their way out of recessions, providing economic 
stimulus with public works. Bush's solution was for the government to de- 
construct itself— hacking off great chunks of the public wealth and feeding 
them to corporate America, in the form of tax cuts on the one hand and lu- 
crative contracts on the other. Bush's budget director, the think-tank ideo- 
logue Mitch Daniels, pronounced, "The general idea— that the business of 
government is not to provide services, but to make sure that they are 
provided— seems self-evident to me." 31 That assessment included disaster re- 
sponse. Joseph Allbaugh, the Republican Party operative whom Bush put in 
charge of the Federal Emergency Management Agency (FEMA)— the body 
responsible for responding to disasters, including terrorist attacks — described 
his new place of work as "an oversized entitlement program." 32 

Then came 9/11, and all of a sudden having a government whose central 
mission was self-immolation did not seem like a very good idea. With a 
frightened population wanting protection from a strong, solid government, 
the attacks could well have put an end to Bush's project of hollowing out 
government just as it was beginning. 

For a while, that even seemed to be the case. "September 1 1 has changed 
everything," said Ed Feulner, Milton Friedman's old friend and president of 
the Heritage Foundation, ten days after the attack, making him one of the first 
to utter the fateful phrase. Many naturally assumed that part of that change 
would be a reevaluation of the radical antistate agenda that Feulner and his 
ideological allies had been pushing for three decades, at home and around the 
world. After all, the nature of the September 1 1 security failures exposed the 
results of more than twenty years of chipping away at the public sector and 
outsourcing government functions to profit-driven corporations. Much as the 
flooding of New Orleans exposed the rotting condition of public infrastruc- 
ture, the attacks pulled back the curtain on a state that had been allowed to 
grow dangerously weak: radio communications for the New York City police 
and firefighters broke down in the middle of the rescue operation, air traffic 
controllers didn't notice the off-course planes in time, and the attackers had 


passed through airport security checkpoints staffed by contract workers, some 
of whom earned less than their counterparts at the food court. 33 

The first major victory of the Friedmanite counterrevolution in the 
United States had been Ronald Reagan's attack on the air traffic controllers' 
union and his deregulation of the airlines. Twenty years later, the entire air 
transit system had been privatized, deregulated and downsized, with the vast 
majority of airport security work performed by underpaid, poorly trained, 
nonunion contractors. After the attacks, the inspector general of the Depart- 
ment of Transportation testified that the airlines, which were responsible for 
security on their flights, had skimped significantly to keep costs down. The 
"counterpressures in turn manifested themselves as significant weaknesses in 
security," he told the Bush-convened 9/1 1 Commission. A longtime Federal 
Aviation Authority security official testifed before the commission that the 
airlines' approach to security was "decry, deny and delay." 34 

On September 10, as long as flights were cheap and plentiful, none of 
that seemed to matter. But on September 12, putting $6-an-hour contract 
workers in charge of airport security seemed reckless. Then, in October, en- 
velopes with white powder were sent to lawmakers and journalists, spreading 
panic about the possibility of a major anthrax outbreak. Once again, nineties 
privatization looked very different in this new light: Why did a private lab 
have the exclusive right to produce the anthrax vaccine? Had the federal 
government signed away its responsibility to protect the public from a major 
public health emergency? It didn't help that Bioport, the privatized lab in 
question, had failed a series of inspections and that the FDA wasn't even au- 
thorizing it to distribute its vaccines at the time. 35 Furthermore, if it was true, 
as media reports kept claiming, that anthrax, smallpox and other deadly 
agents could be spread through the mail, the food supply or the water sys- 
tems, was it really such a good idea to be pushing ahead with Bush's plans to 
privatize the postal service? And what about all those laid-off food and water 
inspectors— could somebody bring them back? 

The backlash against the pro-corporate consensus only deepened in the 
face of new scandals like that of Enron. Three months after the 9/1 1 attacks, 
Enron declared bankruptcy, leading thousands of employees to lose their re- 
tirement savings while executives acting on insider knowledge cashed out. 
The crisis contributed to a general plummeting of faith in private industry to 
perform essential services, especially when it came out that it was Enron's ma- 
nipulation of energy prices that had led to the massive blackouts in California 
a few months earlier. Milton Friedman, aged ninety, was so concerned that 


the tides were shirting back toward Keynesianism that he complained that 
"businessmen are being presented in the public as second-class citizens." 36 

While CEOs were falling from their pedestals, unionized public sector 
workers — the villains of Friedman's counterrevolution-— were rapidly as- 
cending in the public's estimation. Within two months of the attacks, trust 
in government was higher than it had been since 1968 — and that, remarked 
Bush to a crowd of federal employees, is "because of how you've performed 
your jobs." 37 The uncontested heroes of September 1 1 were the blue-collar 
first responders— the New York firefighters, police and rescue workers, 403 of 
whom lost their lives as they tried to evacuate the towers and aid the victims. 
Suddenly, America was in love with its men and women in all kinds of uni- 
forms, and its politicians — slapping on NYPD and FDNY baseball caps with 
unseemly speed— were struggling to keep up with the new mood. 

When Bush stood with the firefighters and rescue workers at Ground Zero 
on September 14— what his advisers call "the bullhorn moment" — he was 
embracing some of the very unionized civil servants that the modern conser- 
vative movement had devoted itself to destroying. Of course he had to do it 
(even Dick Cheney put on a hard hat in those days), but he didn't have to do 
it so convincingly. Through some combination of genuine feeling on Bush's 
part, and the public's projected desire for a leader worthy of the moment, 
these were the most moving speeches of Bush's political career. 

For weeks after the attacks, the president went on a grand tour of the pub- 
lic sector— public schools, firehouses and memorials, the Centers for Dis- 
ease Control and Prevention— embracing and thanking civil servants for 
their contributions and humble patriotism. "We have gained new heroes," 
Bush said in a speech, praising not only emergency services personnel but 
teachers, postal employees and health care workers. 38 At these events, he 
treated work done in the public interest with a level of respect and dignity 
that had not been seen in the United States in four decades. Cost-cutting 
was suddenly off the agenda, and in every speech the president gave, he an- 
nounced some ambitious new public program. 

"The twin demands of a sagging economy and an urgent new war on ter- 
rorism have transformed the philosophical heart of President Bush's agenda," 
confidently declared John Harris and Dana Milbank in The Washington Post 
eleven days after the attacks. "A man who came to power offering himself as 
an ideological descendant of Ronald Reagan has emerged nine months later 
as something closer to an heir of Franklin D. Roosevelt." They further ob- 
served that "Bush is working on a large economic stimulus package to stave 


off recession. He said a weak economy needs its pump primed by govern- 
ment with a big infusion of money— a basic precept of Keynesian econom- 
ics that was at the heart of FDR's New Deal." 39 

A Corporate New Deal 

Public pronouncements and photo ops aside, Bush and his inner circle had 
no intention of converting to Keynesianism. Far from shaking their deter- 
mination to weaken the public sphere, the security failures of 9/1 1 reaf- 
firmed their deepest ideological (and self-interested) beliefs— that only 
private firms possessed the intelligence and innovation to meet the new se- 
curity challenge. Although it was true that the White House was on the 
verge of spending huge amounts of taxpayer money to stimulate the econ- 
omy, it most certainly was not going to be on the model of FDR. Rather, 
Bush's New Deal would be exclusively with corporate America, a straight- 
up transfer of hundreds of billions of public dollars a year into private 
hands. It would take the form of contracts, many offered secretively, with 
no competition and scarcely any oversight, to a sprawling network of indus- 
tries: technology, media, communications, incarceration, engineering, edu- 
cation, health care.* 

What happened in the period of mass disorientation after the attacks was, 
in retrospect, a domestic form of economic shock therapy. The Bush team, 
Friedmanite to the core, quickly moved to exploit the shock that gripped the 
nation to push through its radical vision of a hollow government in which 
everything from war fighting to disaster response was a for-profit venture. 

It was a bold evolution of shock therapy. Rather than the nineties ap- 
proach of selling off existing public companies, the Bush team created a whole 
new framework for its actions— the War on Terror— built to be private from 
the start. This feat required two stages. First, the White House used the om- 
nipresent sense of peril in the aftermath of 9/1 1 to dramatically increase the 
policing, surveillance, detention and war-waging powers of the executive 
branch— a power grab that the military historian Andrew Bacevich has termed 
"a rolling coup." 40 Then those newly enhanced and richly funded functions 

* The lack of competition in awarding contracts has been one of the distinguishing features 
of the Bush years. A New York Times analysis in February 2007 found that "fewer than half of 
all 'contract actions'— new contracts and payments against existing contracts— are now sub- 
ject to full and open competition. Just 48 percent were competitive in 2005, down from 79 
percent in 2001." 



of security, invasion, occupation and reconstruction were immediately out- 
sourced, handed over to the private sector to perform at a profit. 

Although the stated goal was fighting terrorism, the effect was the creation 
of the disaster capitalism complex— a full-fledged new economy in home- 
land security, privatized war and disaster reconstruction tasked with nothing 
less than building and running a privatized security state, both at home and 
abroad. The economic stimulus of this sweeping initiative proved enough to 
pick up the slack where globalization and the dot-com booms had left off. 
Just as the Internet had launched the dot-com bubble, 9/1 1 launched the di- 
saster capitalism bubble. "When the IT industry shut down, post-bubble, 
guess who had all the money? The government" said Roger Novak of Novak 
Biddle Venture Partners, a venture capitalism firm that invests in homeland 
security companies. Now, he says, "every fund is seeing how big the trough is 
and asking, How do I get a piece of that action?" 41 

It was the pinnacle of the counterrevolution launched by Friedman. For 
decades, the market had been feeding off the appendages of the state; now it 
would devour the core. 

Bizarrely, the most effective ideological tool in this process was the claim 
that economic ideology was no longer a primary motivator of U.S. foreign or 
domestic policy. The mantra "September 1 1 changed everything" neatly dis- 
guised the fact that for free-market ideologues and the corporations whose 
interests they serve, the only thing that changed was the ease with which they 
could pursue their ambitious agenda. Now, rather than subjecting new poli- 
cies to fractious public debate in Congress or bitter conflict with public sec- 
tor unions, the Bush White House could use the patriotic alignment behind 
the president and the free pass handed out by the press to stop talking and 
start doing. As The New York Times observed in February 2007, "Without a 
public debate or formal policy decision, contractors have become a virtual 
fourth branch of government." 42 

Rather than meet the security challenge posed by September 1 1 with a com- 
prehensive plan to plug the holes in the public infrastructure, the Bush team 
devised a new role for government, one in which the job of the state was not 
to provide security but to purchase it at market prices. And so, in November 
2001, just two months after the attacks, the Department of Defense brought 
together what it described as "a small group of venture capitalist consultants" 
with experience in the dot-com sector. The mission was to identify "emerg- 
ing technology solutions that directly assist in the U.S. efforts in the Global 


War on Terrorism." By early 2006, this informal exchange had become an 
official arm of the Pentagon: the Defense Venture Catalyst Initiative (De- 
VenCI), a "fully operational office" that continually feeds security informa- 
tion to politically connected venture capitalists, who, in turn, scour the 
private sector for start-ups that can produce new surveillance and related 
products. "We're a search engine," explains Bob Pohanka, director of De- 
VenCI. 43 According to the Bush vision, the role of government is merely to 
raise the money necessary to launch the new war market, then buy the best 
products that emerge out of that creative cauldron, encouraging industry to 
even greater innovation. In other words, the politicians create the demand, 
and the private sector supplies all manner of solutions— a booming econ- 
omy in homeland security and twenty-first-century warfare entirely under- 
written by taxpayer dollars. 

The Department of Homeland Security, as a brand-new arm of the state 
created by the Bush regime, is the clearest expression of this wholly out- 
sourced mode of government. As Jane Alexander, deputy director of the re- 
search wing of the Department of Homeland Security, explained, "We don't 
make things. If it doesn't come from industry, we are not going to be able to 
get it." 44 

Another is Counterintelligence Field Activity (CIFA), a new intelligence 
agency created under Rumsfeld that is independent of the CIA. This parallel 
spy agency outsources 70 percent of its budget to private contractors; like the 
Department of Homeland Security, it was built as a hollow shell. As Ken 
Minihan, former director of the National Security Agency, explained, 
"Homeland security is too important to be left to the government." Minihan, 
like hundreds of other Bush administration staffers, has already left his gov- 
ernment post to work in the bourgeoning homeland security industry, 
which, as a top spy, he helped create 45 

Every aspect of the way the Bush administration has defined the parame- 
ters of the War on Terror has served to maximize its profitability and sustain- 
ability as a market— from the definition of the enemy to the rules of 
engagement to the ever-expanding scale of the battle. The document that 
launched the Department of Homeland Security declares, "Today's terrorists 
can strike at any place, at any time, and with virtually any weapon"— which 
conveniently means that the security services required must protect against 
every imaginable risk in every conceivable place at every possible time. And 
it's not necessary to prove that a threat is real for it to merit a full-scale 
response — not with Cheney's famous "1 percent doctrine," which justified 


the invasion of Iraq on the grounds that if there is a 1 percent chance that 
something is a threat, it requires that the U.S. respond as if the threat is a 100 
percent certainty. This logic has been a particular boon for the makers of 
various high-tech detection devices: for instance, because we can conceive 
of a smallpox attack, the Department of Homeland Security has handed out 
half a billion dollars to private companies to develop and install detection 
equipment to guard against this unproven threat. 46 

Through all its various name changes— the War on Terror, the war on 
radical Islam, the war against Islamofascism, the Third World War, the long 
war, the generational war— the basic shape of the conflict has remained un- 
changed. It is limited by neither time nor space nor target. From a military 
perspective, these sprawling and amorphous traits make the War on Terror 
an unwinnable proposition. But from an economic perspective, they make it 
an unbeatable one: not a flash-in-the-pan war that could potentially be won 
but a new and permanent fixture in the global economic architecture. 

That was the business prospectus that the Bush administration put before 
corporate America after September 11. The revenue stream was a seemingly 
bottomless supply of tax dollars to be funneled from the Pentagon ($270 bil- 
lion a year to private contractors, a $137 billion increase since Bush took 
office); U.S. intelligence agencies ($42 billion a year to contractors for out- 
sourced intelligence, more than double 1995 levels); and the newest arrival, 
the Department of Homeland Security. Between September 11, 2001, and 
2006, the Department of Homeland Security handed out $130 billion to pri- 
vate contractors — money that was not in the economy before and that is 
more than the GDP of Chile or the Czech Republic. In 2003, the Bush ad- 
ministration spent $327 billion on contracts to private companies — nearly 
40 cents of every discretionary dollar. 47 

In a remarkably short time, the suburbs ringing Washington, D.C., be- 
came dotted with gray buildings housing security "start-ups" and "incuba- 
tor" companies, hastily thrown together operations where, as in late-nineties 
Silicon Valley, the money came in faster than the furniture could be assem- 
bled. The Bush administration, meanwhile, played the part of the free- 
spending venture capitalist of that same heady era. Whereas in the nineties 
the goal was to develop the killer application, the "next new new thing," and 
sell it to Microsoft or Oracle, now it was to come up with a new "search and 
nail" terrorist-catching technology and sell it to the Department of Home- 
land Security or the Pentagon. That is why, in addition to the start-ups and 
investment funds, the disaster industry also gave birth to an army of new 


lobby firms promising to hook up new companies with the right people on 
Capitol Hill — in 2001, there were two such security-oriented lobby firms, 
but by mid-2006 there were 543. "I've been in private equity since the early 
'90s," Michael Steed, managing director of the homeland security firm Pal- 
adin told Wired, "and I've never seen a sustained deal flow like this." 48 

A Market for Terrorism 

Like the dot-com bubble, the disaster bubble is inflating in an ad hoc and 
chaotic fashion. One of the first booms for the homeland security industry 
was surveillance cameras, 4.2 million of which have been installed in 
Britain, one for every fourteen people, and 30 million in the U.S., shooting 
about 4 billion hours of footage a year. That created a problem: Who's going 
to watch 4 billion hours of footage? So a new market emerged for "analytic 
software" that scans the tapes and creates matches with images already on 
file (networking various security systems has been the source of some of the 
most lucrative contracts, such as $9 billion from the air force to a consor- 
tium of companies including Booz Allen Hamilton, one of the oldest strat- 
egy consulting firms, and some of the largest defense contractors). 49 

This development created another problem, because facial recognition 
software can really make positive IDs only if people present themselves front 
and center to the cameras, which they rarely do while rushing to and from 
work. So another market was created for digital image enhancement. Salient 
Stills, a company that sells software to isolate and enhance video images, 
started by pitching its technology to media companies, but it turned out that 
there was more potential revenue from the FBI and other law-enforcement 
agencies. 50 And with all the snooping going on — phone logs, wiretapping, fi- 
nancial records, mail, surveillance cameras, Web surfing— the government 
is drowning in data, which has opened up yet another massive market in in- 
formation management and data mining, as well as software that claims to 
be able to "connect the dots" in this ocean of words and numbers and pin- 
point suspicious activity. 

In the nineties, tech companies endlessly trumpeted the wonders of the 
borderless world and the power of information technology to topple author- 
itarian regimes and bring down walls. Today, inside the disaster capitalism 
complex, the tools of the information revolution have been flipped to serve 
the opposite purpose. In the process, cell phones and Web surfing have 
been turned into powerful tools of mass state surveillance by increasingly 


authoritarian regimes, with the full cooperation of privatized phone compa- 
nies and search engines, whether it's Yahoo collaborating with the Chinese 
government to pinpoint the location of dissidents or AT&T helping the U.S. 
National Security Agency to wiretap its customers without a warrant (a prac- 
tice the Bush administration claims it has discontinued). The dismantling of 
borders, the great symbol and promise of globalization, has been replaced 
with the exploding industry of border surveillance, from optical scanning 
and biometric IDs to the planned high-tech fence on the border between 
Mexico and the U.S., worth up to $2.5 billion for Boeing and a consortium 
of other companies. 51 

As high-tech firms have jumped from one bubble to another, the result 
has been a bizarre merger of security and shopping cultures. Many tech- 
nologies in use today as part of the War on Terror— biometric identification, 
video surveillance, Web tracking, data mining, sold by companies like Verint 
Systems and Seisint, Accenture and ChoicePoint— had been developed by 
the private sector before September 1 1 as a way to build detailed customer 
profiles, opening up new vistas for micromarketing. They also promised to 
reduce the number of retail workers at supermarkets and shopping malls, be- 
cause biometric IDs, combined with cash cards, would eliminate the need 
for tellers. When widespread discomfort about big-brother technologies 
stalled many of these initiatives, it caused dismay to both marketers and re- 
tailers. September 1 1 loosened this logjam in the market: suddenly the fear 
of terror was greater than the fear of living in a surveillance society. So now, 
the same information collected from cash cards or "loyalty" cards can be 
sold not only to a travel agency or the Gap as marketing data but also to the 
FBI as security data, flagging a "suspicious" interest in pay-as-you-go cell 
phones and Middle Eastern travel. 52 

As an exuberant article in the business magazine Red Herring explained, 
one such program "tracks terrorists by figuring out if a name spelled a hun- 
dred different ways matches a name in a homeland security database, lake 
the name Mohammad. The software contains hundreds of possible spellings 
for the name, and it can search terabytes of data in a second." 53 Impressive, 
unless they nail the wrong Mohammad, which they have a bad habit of do- 
ing, from Iraq to Afghanistan to the suburbs of Toronto. 

T his potential for error is where the incompetence and greed that have 
been the hallmark of the Bush years, from Iraq to New Orleans, becomes har- 
rowing. One false ID coming out of any of these electronic fishing expedi- 
tions is enough for an apolitical family man, who sort of looks like someone 


whose name sort of sounds like his (at least to someone with no knowledge of 
Arabic or Muslim culture), to be flagged as a potential terrorist. And the pro- 
cess of putting names and organizations on watch lists is also now handled by 
private companies, as are the programs to cross-check the names of travelers 
with the names in the data bank. As of June 2007, there were half a million 
names on a list of suspected terrorists kept by the National Counterterrorism 
Center. Another program, the Automated Targeting System (ATS), made 
public in November 2006, has already assigned a "risk assessment" rating to 
tens of millions of travelers passing through the U.S. The rating, never dis- 
closed to passengers, is based on suspicious patterns revealed through com- 
mercial data mining— for instance, information provided by airlines about 
"the passenger's history of one-way ticket purchase, seat preferences, frequent 
flyer records, number of bags, how they pay for tickets and even what meals 
they order." 54 Incidents of supposedly suspicious behaviour are tallied up to 
generate each passenger's risk rating. 

Anyone can be blocked from flying, denied an entry visa to the U.S. or 
even arrested and named as an "enemy combatant" based on evidence from 
these dubious technologies— a blurry image identified through facial recog- 
nition software, a misspelled name, a misunderstood snippet of a conversa- 
tion. If "enemy combatants" are not U.S. citizens, they will probably never 
even know what it was that convicted them, because the Bush administration 
has stripped them of habeas corpus, the right to see the evidence in court, as 
well as the right to a fair trial and a vigorous defense. 

If the suspect is taken, as a result, to Guantanamo, he may well end up in 
the new two-hundred-person maximum-security prison constructed by Hal- 
liburton. If he is a victim of the CIA's "extraordinary rendition" program, kid- 
napped off the streets of Milan or while changing planes at a U.S. airport, then 
whisked to a so-called black site somewhere in the CIAs archipelago of secret 
prisons, the hooded prisoner will likely fly in a Boeing 737, designed as a 
deluxe executive jet, retrofitted for this purpose. According to The New Yorker, 
Boeing has been acting as the "CIA's travel agent"— blocking out flight plans 
for as many as 1,245 rendition voyages, arranging ground crews and even 
booking hotels. A Spanish police report explains that the work was done by 
Jeppesen International Trip Planning, a Boeing subsidiary in San Jose. In May 
2007, the American Civil Liberties Union launched a lawsuit against the Boe- 
ing subsidiary; the company has refused to confirm or deny the allegations. 55 

Once the prisoners arrive at the destination, they face interrogators, some 
of whom will not be employed by the CIA or the military but by private 


contractors. According to Bill Golden, who runs the job Web site www, "Over half of the qualified counter-intelligence 
experts in the field work for contractors." 56 If these freelance interrogators are 
to keep landing lucrative contracts, they must extract from prisoners the kind 
of "actionable intelligence" their employers in Washington are looking for. 
It's a dynamic ripe for abuse: just as prisoners under torture will usually say 
anything to make the pain stop, contractors have a powerful economic in- 
centive to use whatever techniques are necessary to produce the sought-after 
information, regardless of its reliability. (Part of the reason the Bush admin- 
istration has relied so heavily on private intelligence contractors working in 
new structures like Rumsfeld's secretive Office of Special Plans is that they 
have proven far more willing than their counterparts in governments to mas- 
sage and manipulate information to meet the political goals of the adminis- 
tration—after all, their next contract depends on it.) 

Then there is the low-tech version of this application of market "solu- 
tions" to the War on Terror— the willingness to pay top dollar to pretty much 
anyone for information about alleged terrorists. During the invasion of 
Afghanistan, U.S. intelligence agents let it be known that they would pay 
anywhere from $3,000 to $25,000 for al Qaeda or Taliban fighters handed 
over to them. "Get wealth and power beyond your dreams," stated a typical 
flyer handed out by the U.S. in Afghanistan, introduced as evidence in a 
2002 U.S. federal court filing on behalf of several Guantanamo prisoners. 
"You can receive millions of dollars helping the anti-Taleban forces. . . . This 
is enough money to take care of your family, your village, your tribe for the 
rest of your life." 57 

Soon enough, the cells of Bagram and Guantanamo were overflowing 
with goatherds, cabdrivers, cooks and shopkeepers— all lethally dangerous 
according to the men who turned them over and collected the rewards. 

"Do you have any theories about why the government and the Pakistani 
intel folks would sell you out and turn you over to the Americans?" a mem- 
ber of a military tribunal asked an Egyptian prisoner held in the Guanta- 
namo prison. 

In the declassified transcript, the prisoner appears incredulous. "Come 
on, man," he replied, "you know what happened. In Pakistan you can buy 
people for $10. So what about $5,000?" 

"So they sold you?" the tribunal member asked, as if the thought had 
never before occurred to him. 



According to the Pentagon's own figures, 86 percent of the prisoners at 
Guantanamo were handed over by Afghan and Pakistani fighters or agents 
after the bounties were announced. As of December 2006, the Pentagon had 
released 360 prisoners from Guantanamo. The Associated Press was able to 
track down 245 of them; 205 had been freed or cleared of all charges when 
they returned to their home countries. 58 It is a track record that is a grave in- 
dictment of the quality of intelligence produced by the administration's 
market-based approach to terrorist identification. 

In just a few years, the homeland security industry, which barely existed be- 
fore 9/11, has exploded to a size that is now significantly larger than either 
Hollywood or the music business.' 9 Yet what is most striking is how little the 
security boom is analyzed and discussed as an economy, as an unprece- 
dented convergence of unchecked police powers and unchecked capitalism, 
a merger of the shopping mall and the secret prison. When information 
about who is or is not a security threat is a product to be sold as readily as in- 
formation about who buys Harry Potter books on Amazon or who has taken 
a Caribbean cruise and might enjoy one in Alaska, it changes the values of a 
culture. Not only does it create an incentive to spy, torture and generate false 
information but it creates a powerful impetus to perpetuate the fear and 
sense of peril that created the industry in the first place. 

When new economies emerged in the past, from the Fordist revolution to 
the IT boom, they sparked a flood of analysis and debate about how such 
seismic shifts in the production of wealth were also altering the way we as a 
culture worked, the way we traveled, even the way our brains process infor- 
mation. The new disaster economy has been subject to none of this kind of 
far-reaching discussion. There have been and are debates, of course — about 
the constitutionality of the Patriot Act, about indefinite detention, about tor- 
ture and extraordinary rendition — but discussion of what it means to have 
these functions performed as commercial transactions has been almost com- 
pletely avoided. What passes for debate is restricted to individual cases of war 
profiteering and corruption scandals, as well as the usual hand-wringing 
about the failure of government to adequately oversee private contractors— 
rarely about the much broader and deeper phenomenon of what it means to 
be engaged in a fully privatized war built to have no end. 

Part of the problem is that the disaster economy sneaked up on us. In the 
eighties and nineties, new economies announced themselves with great 
pride and fanfare. The tech bubble in particular set a precedent for a new 


ownership class inspiring deafening levels of hype — endless media lifestyle 
profiles of dashing young CEOs beside their private jets, their remote- 
controlled yachts, their idyllic Seattle mountain homes. 

That kind of wealth is being generated by the disaster complex today, 
though we rarely hear about it. According to a 2006 study, "Since the 'War 
on Terror' began, the CEOs of the top 34 defense contractors have enjoyed 
average pay levels that are double the amounts they received during the four 
years leading up to 9/1 1 ." While these CEOs saw their compensation go up 
an average of 108 percent between 2001 and 2005, chief executives at other 
large American companies averaged only 6 percent over the same period. 60 

The disaster industry may be approaching dot-com levels of profit, but it 
generally has CIA levels of discretion. Disaster capitalists dodge the press, 
play down their wealth and know better than to brag. "We are not celebrat- 
ing that there is this huge industry blossoming around protecting ourselves 
from terrorism," said John Elstner of the Chesapeake Innovation Center, a 
homeland security incubator. "But there is big business going on, and CIC 
is in the middle of it." 61 

Peter Swire, who served as the U.S. government's privacy counselor dur- 
ing the Clinton administration, describes the convergence of forces behind 
the War on Terror bubble like this: "You have government on a holy mission 
to ramp up information gathering and you have an information technology 
industry desperate for new markets." 62 In other words, you have corporatism: 
big business and big government combining their formidable powers to reg- 
ulate and control the citizenry. 




I think that's weird and it's nuts. To suggest that everything we do 
is because we're hungry for money, I think that's crazy. I think you 
need to go back to school. 

—George H. W. Bush in response to an accusation that his son in- 
vaded Iraq to open up new markets for U.S. companies 1 

There's something civil servants have that the private sector 
doesn't. And that is the duty of loyalty to the greater good— the 
duty of loyalty to the collective best interest of all rather than the 
interest of a few. Companies have duties of loyalty to their share- 
holders, not to the country. 

—David M. Walker, comptroller general of the United States, Febru- 
ary 2007 2 

He doesn't see the difference between public and private inter- 

—Sam Gardiner, retired U.S. Air Force coLonel, on Dick Cheney, 
February 2004 3 

In the heat of the midterm elections in 2006, three weeks before announcing 
Donald Rumsfeld's resignation, George W. Bush signed the Defense Autho- 
rization Act in a private Oval Office ceremony. Tucked into its fourteen 
hundred pages is a rider that went almost completely unnoticed at the time. 
It gave the president the power to declare martial law and "employ the armed 


forces, including the National Guard," overriding the wishes of state gover- 
nors, in the event of a "public emergency" in order to "restore public order" 
and "suppress" the disorder. That emergency could be a hurricane, a mass 
protest or a "public health emergency" in which case the army could be 
used to impose quarantines and to safeguard vaccine supplies. 4 Before this 
act, the president had these martial law powers only in the face of an insur- 

With his colleagues on the campaign trail, Democratic Senator Patrick 
Leahy was a lone voice of alarm, entering into the public record that "using 
the military for law enforcement goes against one of the founding tenets of 
our democracy" and pointing out that "the implications of changing the act 
are enormous, but this change was just slipped in the defense bill as a rider 
with little study. Other congressional committees with jurisdiction over these 
matters had no chance to comment, let alone hold hearings on, these pro- 
posals." 5 

In addition to the executive branch, which gained the extraordinary new 
powers, there was at least one other clear winner: the pharmaceutical indus- 
try. In the case of any kind of disease outbreak, the military can now be 
called in to safeguard their labs and drug supplies and impose quarantines — 
a long-standing policy goal of the Bush administration. That was good news 
for Rumsfeld's former company Gilead Sciences, which owns the patent on 
Tamiflu, used to treat avian flu. The new law, as well as continued avian flu 
scares, may even have contributed to Tamiflu's stellar performance after 
Rumsfeld left office; in just five months, its stock price went up 24 percent. 6 

What role did industry interests play in shaping the specifics of the law? 
Perhaps none, but the question is worth asking. Similarly, and on a much 
wider scale, what role did the benefits to contractors such as Halliburton and 
Bechtel and oil companies such as ExxonMobil play in the Bush team's en- 
thusiasm for invading and occupying Iraq? These questions of motivation 
are impossible to answer with any precision, because the people involved are 
notorious for conflating corporate interests with the national interest, to the ex- 
tent that they themselves are seemingly incapable of drawing distinctions. 

In his 2006 book Overthrow, the former New York Times correspondent 
Stephen Kinzer tries to get to the bottom of what has motivated the U.S. 
politicians who have ordered and orchestrated foreign coups d'etat over the 
past century. Studying U.S. involvement in regime change operations from 
Hawaii in 1893 to Iraq in 2003, he observes that there is often a clear three- 
stage process that takes place. First, a U.S.-based multinational corporation 


faces some kind of threat to its bottom line by the actions of a foreign gov- 
ernment demanding that the company "pay taxes or that it observe labor laws 
or environmental laws. Sometimes that company is nationalized or is some- 
how required to sell some of its land or its assets," Kinzer says. Second, U.S. 
politicians hear of this corporate setback and reinterpret it as an attack on the 
United States: "They transform the motivation from an economic one into a 
political or geo-strategic one. They make the assumption that any regime that 
would bother an American company or harass an American company must 
be anti-American, repressive, dictatorial, and probably the tool of some for- 
eign power or interest that wants to undermine the United States." The third 
stage happens when the politicians have to sell the need for intervention to 
the public, at which point it becomes a broadly drawn struggle of good versus 
evil, "a chance to free a poor oppressed nation from the brutality of a regime 
that we assume is a dictatorship, because what other kind of a regime would 
be bothering an American company?" 7 Much of U.S. foreign policy, in other 
words, is an exercise in mass projection, in which a tiny self-interested elite 
conflates its needs and desires with those of the entire world. 

Kinzer points out that this tendency has been especially pronounced in 
politicians who move directly from the corporate world into public office. 
For instance, Eisenhower's secretary of state, John Foster Dulles, worked as a 
high-powered international corporate lawyer for most of his life, representing 
some of the richest firms in the world in their conflicts with foreign govern- 
ments. Dullest various biographers have concluded, like Kinzer, that the 
secretary of state was simply incapable of distinguishing between the inter- 
ests of corporations and the interests of his country. "Dulles had two lifelong 
obsessions: fighting Communism and protecting the rights of multinational 
corporations," writes Kinzer. "In his mind they were . . . 'interrelated and 
mutually reinforcing.' " 8 That meant he didn't need to choose between his 
obsessions: if the Guatemalan government took an action that hurt the inter- 
ests of the United Fruit Company, for instance, that was a de facto attack on 
America and worthy of a military response. 

As it pursues its twin obsessions of fighting terrorism and protecting the 
interests of multinational corporations, the Bush administration, packed 
with CEOs fresh from the boardroom, is subject to the same confusions and 
conflations. But there is a significant difference. The companies with which 
Dulles identified were multinationals with large international investments in 
foreign countries— in mining, agriculture, banking and oil. These companies 
generally shared a straightforward objective: they wanted stable, profitable 


environments in which to do business— loose investment laws, pliant work- 
ers and no nasty expropriation surprises. Coups and military interventions 
were a means to that end, not the goal itself. 

As proto-disaster capitalists, the architects of the War on Terror are part of 
a different breed of corporate-politicians from their predecessors, one for 
whom wars and other disasters are indeed ends in themselves. When Dick 
Cheney and Donald Rumsfeld conflate what is good for Lockheed, Hal- 
liburton, Carlyle and Gilead with what is good for the United States and 
indeed the world, it is a form of projection with uniquely dangerous conse- 
quences. That's because what is unquestionably good for the bottom line of 
these companies is cataclysm— wars, epidemics, natural disasters and re- 
source shortages— which is why all their fortunes have improved dramati- 
cally since Bush took office. What makes their acts of projection even more 
perilous is the fact that, to an unprecedented degree, key Bush officials have 
maintained their interests in the disaster capitalism complex even as they 
have ushered in a new era of privatized war and disaster response, allowing 
them to simultaneously profit from the disasters they help unleash. 

For instance, when Rumsfeld resigned his post after the Republican de- 
feat in the 2006 midterm elections, the press reported that he was returning 
to the private sector. The truth was that he never actually left. When he ac- 
cepted Bush's nomination as defense secretary, Rumsfeld, like all public of- 
ficials, was required to divest himself of any holdings that stood to lose or 
gain from decisions he might make while in office. Simple enough— that 
meant selling everything related to national security or defense. But Rums- 
feld had a great deal of trouble. He was so weighed down with holdings in 
various disaster-related industries that he claimed it was impossible to disen- 
tangle himself in time to meet the deadlines, and he tied the ethics rules in 
knots trying to hold on to everything he could. 

He sold off his directly owned stocks in Lockheed, Boeing and other de- 
fense companies and put up to $50 million worth of stocks in a blind trust. 
But he still was part or complete owner of private investment firms that were 
devoted to defense and biotechnology stocks. Rumsfeld was unwilling to 
take losses to sell those companies quickly and instead asked for two three- 
month extensions to the time limit— extremely rare at that level of govern- 
ment. That meant he was still looking for what he considered suitable buyers 
for his companies and assets a full six months into his term as defense secre- 
tary, possibly even longer. 9 

When it came to Gilead Sciences, the company Rumsfeld used to chair 


and that held the patent on Tamiflu, the secretary of defense put his foot 
down. Asked to choose between his business interests and his public calling, 
he simply refused. Epidemics are national security issues and therefore 
squarely within the portfolio of the defense secretary. Yet despite this glaring 
conflict of interest, Rumsfeld failed to sell off his Gilead stocks for his entire 
term in office, holding on to somewhere between $8 million and $39 million 
worth of Gilead holdings. 10 

As the Senate Ethics Committee tried to bring him into compliance with 
standard conflict rules, Rumsfeld was openly belligerent. At one point, he 
wrote a letter to the Office of Government Ethics complaining that he had to 
spend $60,000 on accountants' fees to help him with "excessively complex 
and confusing" disclosure forms. For a man bent on holding on to $95 mil- 
lion in shares while in office, $60,000 in finessing fees hardly seemed out of 
proportion. 11 

Rumsfeld's adamant refusal to stop making money from disaster while in 
the top security post in the country affected his job performance in several 
concrete ways. For much of his first year in office, while he looked to off-load 
his holdings, Rumsfeld had to recuse himself from an alarming range of crucial 
policy decisions: according to the Associated Press, "he has avoided Penta- 
gon meetings in which AIDS is discussed " And when the federal govern- 
ment had to decide whether to intervene in several high-profile mergers and 
sales involving top defense contractors, including General Electric, Honey- 
well, Northrop Grumman and Silicon Valley Graphics, Rumsfeld recused 
himself from those top-level talks as well. It turned out, according to his offi- 
cial spokesperson, that he had financial ties to several of the companies listed 
above. "I have tended to stay away from them thus far," Rumsfeld told a re- 
porter who asked about one of the sales. 12 

For the six years that he held office, Rumsfeld had to leave the room when- 
ever talk turned to the possibility of avian flu treatment and the purchase of 
drugs for it. According to the letter outlining the arrangement that allowed 
him to hold on to his stocks, he had to stay out of decisions that "may directly 
and predictably affect Gilead." 13 His colleagues, however, took good care of 
his interests. In July 2005, the Pentagon purchased $58 million worth of Tam- 
iflu, and the Department of Health and Human Services announced that it 
would order up to $1 billion worth of the drug a few months later. 14 

Rumsfeld's defiance definitely paid off. If he had sold his Gilead stocks at 
inauguration, in January 2001, he would have received a mere $7.45 each. 
By keeping them through all the avian flu scares, all the bioterror hysteria 


and through his own administration's decisions to invest heavily in the com- 
pany, Rumsfeld ended up with stocks worth $67.60 each when he left 
office— an 807 percent increase. (By April 2007 the price had reached $84 
each.) 15 That meant that when Rumsfeld left his post as defense secretary, he 
did so a significantly wealthier man than when he arrived— a rare occur- 
rence for a multimillionaire in public office. 

If Rumsfeld never really left Gilead behind, Cheney was equally reluctant 
to fully sever his ties to Halliburton— an arrangement that, unlike Rums- 
feld's with Gilead, has been the subject of a great deal of media attention. 
Before stepping down as CEO to be George Bush's running mate, Cheney 
negotiated a retirement package that left him loaded with Halliburton stocks 
and options. After some uncomfortable press questions, he agreed to sell 
some of his Halliburton shares, making an impressive $18.5 million profit in 
the process. But he didn't cash out entirely. According to The Wall Street 
Journal, Cheney hung on to 189,000 Halliburton shares and 500,000 un- 
vested options even as he entered the vice presidency. 16 

The fact that Cheney still maintains such a quantity of Halliburton shares 
means that throughout his term as vice president, he has collected millions 
every year in dividends from his stocks and has also been paid an annual de- 
ferred income by Halliburton of $21 1,000 — roughly equivalent to his gov- 
ernment salary. When he leaves office in 2009 and is able to cash in his 
Halliburton holdings, Cheney will have the opportunity to profit extrava- 
gantly from the stunning improvement in Halliburton's fortunes. The com- 
pany's stock price rose from $10 before the war in Iraq to $41 three years 
later— a 300 percent jump, thanks to a combination of soaring energy prices 
and Iraq contracts, both of which flow directly from Cheney's steering the 
country into war with Iraq. 17 Iraq seems to fit Kinzer's formula perfectly. Sad- 
dam did not pose a threat to U.S. security, but he did pose a threat to U.S. en- 
ergy companies, since he had recently signed contracts with a Russian oil 
giant and was in negotiations with France's Total, leaving U.S. and British 
oil firms with nothing; the third-largest proven oil reserves in the world were 
slipping out of the Anglo-American grasp. 18 Saddam's removal from power 
has opened vistas of opportunities for the oil giants, including ExxonMobil, 
Chevron, Shell and BP, all of whom have been laying the groundwork for 
new deals in Iraq, as well as for Halliburton, which, with its move to Dubai, 
is perfectly positioned to sell its energy services to all these companies. 19 Al- 
ready the war itself has been the single most profitable event in Halliburton's 


Both Rumsfeld and Cheney could have taken simple measures to divest 
themselves completely of their disaster-related holdings, thereby eliminating 
any doubt about what role profit has played in their enthusiasm for disaster- 
producing situations. But then they would have missed the boom years in 
their own industries. Asked to choose between private profit and public life, 
again and again they chose profit, forcing the government ethics committees 
to adapt to their defiant stance. 

During the Second World War, President Franklin D. Roosevelt spoke 
out strongly against war profiteers, saying, "I don't want to see a single war 
millionaire created in the United States as a result of this world disaster." 
One wonders what he would have made of Cheney, whose millions in war 
profits accumulated while he was a sitting vice president. Or Rumsfeld, who, 
in 2004, couldn't resist cashing in a few Gilead stocks, making an easy $5 
million, according to his annual disclosure report, while he was defense 
secretary— a small taste of the profits that awaited him when he left office. 20 
In the Bush administration, the war profiteers aren't just clamoring to get ac- 
cess to government, they are the government; there is no distinction between 
the two. 

The Bush years have, of course, been characterized by some of the seedi- 
est and most blatant corruption scandals in recent memory: Jack Abramoff 
and his golfing vacations offered to members of Congress; Randy "Duke" 
Cunningham, now serving eight years for accepting bribes and donating his 
yacht the Duke-Stir as part of a "bribe menu" listed on official congressional 
letterhead to a defense contractor; and the parties at the Watergate hotel with 
courtesy prostitutes— all sounding very much like Moscow and Buenos Aires 
in the mid-nineties. 21 

Then there is the whirling revolving door between government and in- 
dustry. It has always been there, but for the most part political figures used to 
wait until their administration was out of office before cashing in on govern- 
ment connections. Under Bush, the nonstop homeland security market bo- 
nanza has proved too tempting for many administration officials to resist. So, 
rather than wait until the end of their terms, hundreds, from a wide range of 
government agencies, have already charged for the door. According to Eric 
Lipton, who has tracked this phenomenon in the Department of Homeland 
Security for The New York Times, "veteran Washington lobbyists and watch- 
dog groups say the exodus of such a sizable share of an agency's senior man- 
agement before the end of an administration has few modern parallels." 
Lipton identified ninety-four examples of civil servants who had been working 


on domestic security and who are now working in some aspect of the home- 
land security industry. 22 

There are far too many such cases to detail here, but a few stand out, 
since they involve the key architects of the War on Terror. John Ashcroft, for- 
mer attorney general and prime mover behind the Patriot Act, now heads up 
the Ashcroft Group, specializing in helping homeland security firms pro- 
cure federal contracts. Tom Ridge, the first head of the Department of 
Homeland Security, is now at Ridge Global and an adviser to the communi- 
cation technology company Lucent, which is active in the security sector. 
Rudy Giuliani, the former New York mayor and hero of the September 1 1 re- 
sponse, started Giuliani Partners four months later to sell his services as a cri- 
sis consultant. Richard Clarke, counterterrorism czar under Clinton and 
Bush and an outspoken critic of the administration, is now chairman of 
Good Harbor Consulting, specializing in homeland security and counterter- 
rorism. James Woolsey, head of the CIA until 1995, is now at Paladin Capi- 
tal Group, a private equity firm that invests in homeland security companies, 
and a vice president at Booz Allen, one of the leaders in the homeland secu- 
rity industry. Joe Allbaugh, head of FEMA on September 11, cashed out just 
eighteen months later to start New Bridge Strategies, promising to be the 
"bridge'' between business and the lucrative world of government contracts 
and investment opportunities in Iraq. He was replaced by Michael Brown, 
who bolted after only two years to start Michael D. Brown LLC, specializing 
in disaster preparedness. 23 

"Can I quit now?" Brown wrote in an infamous e-mail to a fellow FEMA 
staffer in the middle of the Hurricane Katrina disaster. 24 That is pretty much 
the philosophy: stay in government just long enough to get an impressive ti- 
tle in a department handing out big contracts and to collect inside informa- 
tion on what will sell, then quit and sell access to your former colleagues. 
Public service is reduced to little more than a reconnaissance mission for fu- 
ture work in the disaster capitalism complex. 

In some ways, however, the stories about corruption and revolving doors 
leave a false impression. They imply that there is still a clear line between 
the state and the complex, when in fact that line disappeared long ago. The 
innovation of the Bush years lies not in how quickly politicians move from 
one world to the other but in how many feel entitled to occupy both worlds 
simultaneously. People like Richard Perle and James Baker make policy, of- 
fer top-level advice and speak in the press as disinterested experts and states- 
men when they are at the same time utterly embedded in the business of 


privatized war and reconstruction. They embody the ultimate fulfillment of 
the corporatist mission: a total merger of political and corporate elites in the 
name of security, with the state playing the role of chair of the business 
guild— as well as the largest source of business opportunities, thanks to the 
contract economy. 

Wherever it has emerged over the past thirty-five years, from Santiago to 
Moscow to Beijing to Bush's Washington, the alliance between a small cor- 
porate elite and a right-wing government has been written off as some sort 
of aberration — mafia capitalism, oligarchy capitalism and now, under Bush, 
"crony capitalism." But it's not an aberration; it is where the entire Chicago 
School crusade— with its triple obsessions— privatization, deregulation and 
union-busting— has been leading. 

Rumsfeld's and Cheney's dogged refusals to choose between their 
disaster-connected holdings and their public duties were the first sign that a 
genuine corporatist state had arrived. There are many others. 

The Power of the Formers 

One of the distinguishing features of the Bush administration has been its re- 
liance on outside advisers and freelance envoys to perform key functions: 
James Baker, Paul Bremer, Henry Kissinger, George Shultz, Richard Perle, 
as well as the members of the Defense Policy Board and the Committee for 
the Liberation of Iraq, to name just a few. While Congress played a rubber- 
stamp role during the pivotal decision-making years, and Supreme Court 
rulings are treated as little more than gentle suggestions, these mostly volun- 
teer advisers have wielded enormous influence. 

Their power stems from the fact that these advisers used to perform key 
roles in government— they are former secretaries of state, former ambassa- 
dors and former undersecretaries of defense. All have been out of govern- 
ment for years and, in the meantime, have set up lucrative careers in the 
disaster capitalism complex. Because they are classified as contractors, not 
staff, most are not subject to the same conflict-of-interest rules as elected or 
appointed politicians— if they are subject to any restrictions at all. The effect 
has been to eliminate the so-called revolving door between government and 
industry and put in "an archway" (as the disaster management specialist Ir- 
win Redlener put it to me). It has allowed the disaster industries to set up 
shop inside the government, using the reputations of such illustrious ex- 
politicians as cover. 


When in March 2006 James Baker was named cochair of the Iraq Study 
Group, the advisory panel charged with recommending a new way forward 
in Iraq, there was palpable bipartisan relief: here was a politician of the old 
school, one who had steered the country in more stable times, a grown-up. 
Certainly Baker is a veteran of a less reckless era of U.S. foreign policy than 
the current one. But that was fifteen years ago. Who is James Baker now? 

Like Cheney, when he left office at the end of Bush Sr.'s term, James 
Baker III made a fortune from his government contacts. Particularly lucra- 
tive were the friends he made in Saudi Arabia and Kuwait during the first 
Gulf War. 25 His Houston-based law firm, Baker Botts, represents the Saudi 
royal family as well as Halliburton and Gazprom, Russia's largest oil com- 
pany, and is one of the leading oil and gas law firms in the world. He also be- 
came an equity partner in the Carlyle Group, earning an estimated $180 
million stake in the highly secretive company. 26 

Carlyle has benefited enormously from the war, thanks to sales of robot- 
ics systems, defense communications systems, and a major Iraq contract to 
train police awarded to its holding, USIS. The $56 billion company has a 
defense-oriented equity firm that specializes in collecting defense contrac- 
tors and taking them public, a very profitable enterprise in recent years. "It's 
the best 18 months we ever had," said Carlyle's chief investment officer, 
Bill Conway, referring to the first eighteen months of the war in Iraq. "We 
made money and we made it fast." The war in Iraq, already clearly a disas- 
ter, translated into a record-breaking $6.6 billion payout to Carlyle's select 
investors. 27 

When Bush Jr. pulled Baker back into public life by naming him his spe- 
cial envoy on Iraq's debt, Baker did not have to cash out of the Carlyle 
Group or Baker Botts, despite their direct interests in the war. At first, several 
commentators pointed out these serious potential conflicts. The New York 
Times published an editorial calling on Baker to resign his posts at the Car- 
lyle Group and Baker Botts to preserve the integrity of the debt envoy posi- 
tion. "Mr. Baker is far too tangled in a matrix of lucrative private business 
relationships that leave him looking like a potentially interested party in any 
debt-restructuring formula," stated the editorial. It concluded that it wasn't 
enough for Baker to "forgo earnings from clients with obvious connections 
to Iraqi debts. ... To perform honorably in his new public job, Mr. Baker 
must give up these two private ones." 28 

In keeping with the example set at the top of the administration, Baker 
simply refused, and Bush backed his decision, leaving Baker in charge of the 


effort of persuading governments around the world to forgive Iraq's crushing 
foreign debt. After he had been in the role for nearly a year, I obtained a 
copy of a confidential document that proved that he was in a far more serious 
and direct conflict of interest than previously understood. The document 
was a sixty-five-page business plan submitted by a consortium of companies, 
including the Carlyle Group, to the government of Kuwait, one of Iraq's 
main creditors. The consortium offered to use its high-level political con- 
nections to collect from Iraq $27 billion in unpaid debts to Kuwait stem- 
ming from Saddam's invasion of Kuwait— in other words, to do exactly the 
opposite of what Baker was supposed to be doing as envoy, which was to 
convince governments that Saddam-era debts should be canceled. 29 

The document, titled "Proposal to Assist the Government of Kuwait in 
Protecting and Realizing Claims against Iraq," was submitted almost two 
months after Baker's appointment. It named James Baker personally eleven 
times, making it clear that Kuwait would benefit from working with a com- 
pany that employed the man in charge of erasing Iraq's debts. But there was 
a price. In exchange for these services, the documents said, the government 
of Kuwait would have to invest $1 billion with the Carlyle Group. It was 
straight-up influence peddling: pay Baker's company to get protection from 
Baker. I showed the document to Kathleen Clark, a law professor at Wash- 
ington University and a leading expert on government ethics and regula- 
tions, and she said Baker was in a "classic conflict of interest. Baker is on two 
sides of this transaction: he is supposed to be representing the interests of the 
United States, but he is also a senior counselor at Carlyle, and Carlyle wants 
to get paid to help Kuwait recover its debts from Iraq." After examining the 
documents, Clark determined that "Carlyle and the other companies are ex- 
ploiting Baker's current position to try to land a deal with Kuwait that would 
undermine the interests of the U.S. government." 

The day after my story about Baker was published in The Nation, Carlyle 
backed out of the consortium, forfeiting its hope of landing the $1 billion; 
several months later, Baker cashed out of the Carlyle Group and resigned as 
general counsel. But the real damage had been done: Baker had performed 
miserably as envoy, failing to secure the kind of debt forgiveness that Bush 
had pledged and Iraq required. In 2005 and 2006, Iraq made $2.59 billion 
in reparation payments for Saddam's war, most to Kuwait— resources that 
were desperately needed to meet Iraq's humanitarian crisis and to rebuild 
the country, especially after U.S. firms pulled out with the aid money squan- 
dered and the job left undone. Baker's mandate was to erase 90 to 95 percent 


of Iraq's debt. Instead, the debt was merely rescheduled and is still equiva- 
lent to 99 percent of the country's GDP. 30 

Other key aspects of Iraq policy were also handed to freelance envoys 
whose companies earned record profits from the war. Former secretary of 
state George Shultz headed up the Committee for the Liberation of Iraq, a 
pressure group formed in 2002 at the request of the Bush White House to 
help it build the case for war in the public mind. Shultz certainly obliged. 
Since his role was at arm's length from the administration, he was able to 
whip up hysteria about the imminent danger posed by Saddam, entirely free 
from any burden of proof or fact. "If there is a rattlesnake in the yard, you 
don't wait for it to strike before you take action in self-defense," he wrote in 
The Washington Post in September 2002 under the headline "Act Now: The 
danger is immediate. Saddam Hussein must be removed." Shultz did not dis- 
close to his readers that he was, at the time, a member of the board of direc- 
tors of Bechtel, where he had served many years earlier as CEO. The 
company would collect $2.3 billion to reconstruct the country that Shultz 
was so eager to see destroyed. 31 So, in retrospect, it seems worth asking, when 
Shultz called on the world to Act Now, was he speaking as a concerned elder 
statesman or as a representative of Bechtel — or perhaps Lockheed Martin? 

According to Danielle Brian, executive director of the Project on Govern- 
ment Oversight, a nonprofit watchdog group, "It's impossible to tell where the 
government ends and Lockheed begins." It's even harder to tell where Lock- 
heed ends and the Committee for the Liberation of Iraq begins. The group 
Shultz headed and used as a pro-war platform was convened by Bruce Jack- 
son, who, just three months earlier, held the job of vice president for strat- 
egy and planning at Lockheed Martin. Jackson says that he was asked to 
form the group by "people in the White House," but he stacked it with old 
colleagues from Lockheed. Besides Jackson, Lockheed's representatives in- 
cluded Charles Kupperman, Lockheed Martin's vice president for space 
and strategic missiles, and Douglas Graham, Lockheed's director of defense 
systems. Even though the committee was formed at the explicit request of 
the White House to be the propaganda arm of the war, no one had to step 
down from Lockheed or sell his shares. Which was certainly good for com- 
mittee members, since Lockheed's share price jumped 145 percent thanks 
to the war they helped engineer— from $41 in March 2003 to $102 in Feb- 
ruary 2007. 32 

And then there is Henry Kissinger, the man who kicked off the counter- 
revolution with his support for Pinochet's coup. In his 2006 book State of 


Denial, Bob Woodward revealed that Dick Cheney holds monthly meetings 
with Kissinger, while Bush meets with Kissinger about half as frequently, 
"making him the most regular and frequent outside adviser to Bush on for- 
eign affairs." Cheney told Woodward, "I probably talk to Henry Kissinger 
more than I talk to anybody else." 33 

But who was Kissinger representing in all those top-level meetings? Like 
Baker and Shultz, he used to be a secretary of state, but hasn't held that post 
for three decades. Since 1982, when he started his privately held and secre- 
tive company, Kissinger Associates, his job has been to represent a roster of 
clients that is said to have included everyone from Coca-Cola to Union Car- 
bide to Hunt Oil to the engineering giant Fluor (one of the biggest recon- 
struction contract winners in Iraq)— and even his old partner in the Chilean 
covert action, ITT. 34 So when he met with Cheney, was he acting as elder 
statesman, or as high-priced lobbyist for his oil and engineering clients? 

Kissinger gave a strong indication of where his loyalties lay in November 
2002, when Bush named him to chair the 9/1 1 Commission, perhaps the 
most crucial role any patriot could be called out of retirement to perform. 
Yet when the families of the victims asked Kissinger to produce a list of his 
corporate clients, pointing to potential conflicts of interest with the investi- 
gation, he refused to cooperate with this basic gesture of public accountabil- 
ity and transparency. Rather than disclose the names of his clients, he 
stepped down as chair of the commission. 35 

Richard Perle, a friend and business associate of Kissinger's, would make 
that precise choice a year later. Perle, a defense official under Reagan, was 
asked by Rumsfeld to chair the Defense Policy Board. Before Perle took over, 
the board was a quiet advisory panel, a way to pass on the knowledge of for- 
mer administrations to the one in office. Perle turned it into a platform for 
himself, using the impressive title to argue forcefully in the press for a pre- 
emptive attack on Iraq. He also used it in other ways. According to a Sey- 
mour Hersh investigation in The New Yorker, he touted the title to solicit 
investment for his new company. Perle, it turned out, was one of the first 
post-9/1 1 disaster capitalists — just two months after the attacks, he launched 
his venture capital firm Trireme Partners, which would invest in firms devel- 
oping products and services relevant to homeland security and defense. In 
letters soliciting business, Trireme boasted of its political connections: 
"Three of Trireme's Management Group members currently advise the U.S. 
Secretary of Defense by serving on the U.S. Defense Policy Board." Those 
three were Perle, his friend Gerald Hillman and Henry Kissinger. 36 


One of Perle's early investors was Boeing— the Pentagon's second-largest 
contractor— which kicked in $20 million to get Trireme going. Perle be- 
came an outspoken Boeing fan, writing an op-ed supporting Boeing's con- 
troversial $17 billion tanker contract with the Pentagon.* 37 

Although Perle told his investors all about his pull at the Pentagon, several 
of his colleagues on the Defense Policy Board say he failed to tell them about 
Trireme. On hearing about the company, one described it as "at the edge of 
or off the ethical charts." In the end, all the knots of conflict caught up with 
Perle and he, like Kissinger, had to choose: make defense policy or profit 
from the War on Terror. In March 2003, just as the war in Iraq was starting 
and the contractor bonanza was about to begin, Perle stepped down as chair- 
man of the Defense Policy Board. 38 

There is nothing that enrages Richard Perle more than the suggestion 
that his advocacy of unlimited war to end all evil is in any way influenced by 
the enormous profitability of that proposition for him personally. On CNN, 
Wolf Blitzer confronted Perle with Hersh's observation that "he has set up a 
company that may gain from a war." It would seem self-evidently true, yet 
Perle blew up, calling Hersh, a Pulitzer Prize winner, "the closest thing 
American journalism has to a terrorist, frankly." He told Blitzer, "I don't be- 
lieve that a company would gain from a war. . . . The suggestion that my 
views are somehow related for the potential for investments in homeland de- 
fense is complete nonsense." 39 

It was a strange claim. If a venture capital firm that was set up to invest in se- 
curity and defense companies managed not to gain from a war, it would surely 
be failing its investors. The episode raised larger questions about the role 
played by figures such as Perle, who exist in a gray zone between disaster capi- 
talist, public intellectual and policy maker. If a Lockheed or Boeing executive 
went on Fox News to make the case for regime change in Iran (as Perle has 
done), their obvious self-interest would negate any intellectual arguments they 

* The tanker deal became the biggest scandal in recent Pentagon history, ultimately landing 
a senior Department of Defense official and a Boeing executive in jail. The official had been 
negotiating for a job at Boeing while the deal was going down. In a subsequent investigation, 
Rumsfeld was questioned about why he didn't catch the rotten deal under his watch. He 
replied that he could not recall the details of his role in a contract that would consume be- 
tween $17 billion and $30 billion of taxpayer money. "I don't remember approving it. But I 
certainly don't remember not approving it, if you will." Rumsfeld was slammed for poor man- 
agement, but his forgetfulness may also have been a casualty of how frequently the secre- 
tary of defense recused himself from purchasing discussions in order to avoid the 
appearance of conflicts with his many defense-related holdings. 


offered. Yet Perle continues to be introduced as an "analyst" or as a Pentagon 
adviser, perhaps as "a neocon," but certainly there is never any suggestion that 
he might just be an arms dealer with an impressive vocabulary. 

Whenever members of this Washington clique are confronted with their 
economic interests in the wars they support, they invariably respond the way 
Perle did: the entire suggestion is preposterous, simple-minded, vaguely ter- 
rorist. The neocons— a group that includes Cheney, Rumsfeld, Shultz, Jack- 
son and, I would argue, Kissinger— take great pains to project themselves as 
egghead intellectuals or hawkish realists, driven by ideology and big ideas, 
not anything so worldly as profit. Bruce Jackson, for instance, says Lockheed 
did not approve of his extracurricular foreign policy work. Perle says that his 
association with the Pentagon has hurt him in business since "it means there 
are . . . things you can't say and do." Perle's partner Gerald Hillman insists 
that Perle "is not a financial creature. He doesn't have any desire for finan- 
cial gain." Douglas Feith, when he was undersecretary of defense for policy, 
claimed that "the vice president's former connection [with Halliburton] 
made people in the government reluctant to award the contract, not eager to 
do it, even though awarding it to KBR [Kellogg, Brown and Root, the former 
Halliburton subsidiary] was the right thing to do." 40 

Even their most committed critics tend to portray the neocons as true be- 
lievers, motivated exclusively by a commitment to the supremacy of Ameri- 
can and Israeli power that is so all-consuming they are prepared to sacrifice 
economic interests in favor of "security." This distinction is both artificial and 
amnesiac. The right to limitless profit-seeking has always been at the center of 
neocon ideology. Before 9/11, demands for radical privatization and attacks 
on social spending fuelled the neocon movement— Friedmanite to its core— 
at think tanks such as the American Enterprise Institute, Heritage and Cato. 

With the War on Terror, the neocons didn't abandon their corporatist 
economic goals; they found a new, even more effective way to achieve them. 
Of course these Washington hawks are committed to an imperial role for the 
United States in the world and for Israel in the Middle East. It is impossible, 
however, to separate that military project— endless war abroad, and a secu- 
rity state at home— from the interests of the disaster capitalism complex, 
which has built a multibillion-dollar industry based on these very assump- 
tions. Nowhere has the merger of these political and profit-making goals 
been clearer than on the battlefields of Iraq. 




One of the risks in shock-based operations has to do 
with the likelihood of "unintended consequences," or in 
precipitating reactions that have not been anticipated. 
For example, extensive attacks against a nation's infra- 
structure, electrical grid, or economic system can cre- 
ate such extreme hardship that the resulting backlash 
bolsters rather than weakens our opponent's national 
will to fight. 

—Lieutenant Colonel John N. T. Shanahan, "Shock- 
Based Operations," Air& Space Power, October 15, 2001 

Direct physical brutality creates only resentment, hos- 
tility, and further defiance. . . . Interrogatees who have 
withstood pain are more difficult to handle by other 
methods. The effect has been not to repress the subject 
but to restore his confidence and maturity. 

—Kubark Counterintelligence Interrogation, 
CIA manual, 1963 




The introverted schizophrenic or melancholic may be likened to a 
walled city which has closed its gates and refuses to trade with 
the rest of the world. ... A breach is blown in the wall, and rela- 
tions with the world are re-established. Unfortunately we cannot 
control the amount of damage done in the bombardment. 
—Andrew M. WyUie, a British psychiatrist, on electroshock therapy, 

mo 1 

In a post-Sept. 11 world, I thought the prudent use of violence 
could be therapeutic. 

—Richard Cohen, a Washington Post columnist, on his support for 
the invasion of Iraq 2 

It was March 2004. I had been in Baghdad for less than three hours, and it 
wasn't going well. First, our car hadn't shown up at the airport checkpoint, 
and my photographer, Andrew Stern, and I had to hitch a ride on what was 
already being called "the most dangerous road in the world." When we 
made it to the hotel in the busy Karada district, we were greeted by Michael 
Birmingham, an Irish peace activist who had moved to Baghdad before the 
invasion. I had asked if he could introduce me to a few Iraqis concerned 
about the plans to privatize their economy. "No one here cares about privati- 
zation," Michael told us. "What they care about is surviving." 

A tense debate followed about the ethics of bringing a political agenda to 
a war zone. Michael wasn't saying that Iraqis supported the privatization 


plans— only that most people had more urgent concerns. They were worried 
about bombs going off in their mosques or finding a cousin who has disap- 
peared into the U.S.-run Abu Ghraib prison. They were thinking about how 
to get drinking and bathing water for tomorrow, not whether a foreign com- 
pany wanted to privatize their water system and sell it back to them in a year. 
The job of an outsider, he argued, is to try to document the reality of war and 
occupation, not to decide what Iraqi priorities ought to be. 

I defended myself as best as I could, pointing out that selling this country 
off to Bechtel and ExxonMobil wasn't an idea I had dreamed up — it was al- 
ready in its early stages, spearheaded by the White House's top envoy to Iraq, 
L. Paul Bremer III. For months I had been reporting on the auctioning off of 
Iraq's state assets from trade shows in hotel ballrooms, surreal events where 
body-armor salesmen terrified businessmen with stories of severed limbs while 
U.S. trade officials assured everyone that it really wasn't as bad as it seemed 
on TV. "The best time to invest is when there is still blood on the ground," I 
was told earnestly by a delegate at the "Rebuilding Iraq 2" conference in 
Washington, D.C. 

The fact that it was hard to find people in Baghdad who were interested 
in talking about economics was not surprising. The architects of this inva- 
sion were firm believers in the shock doctrine — they knew that while Iraqis 
were consumed with daily emergencies, the country could be auctioned off 
discreetly and the results announced as a done deal. As for journalists and 
activists, we seemed to be exhausting our attention on the spectacular phys- 
ical attacks, forgetting that the parties with the most to gain never show up 
on the battlefield. And in Iraq there was plenty to gain: not just the world's 
third-largest proven oil reserves but territory that was one of the last remain- 
ing holdouts from the drive to build a global market based on Friedman's 
vision of unfettered capitalism. After the crusade had conquered Latin 
America, Africa, Eastern Europe and Asia, the Arab world called out as its 
final frontier. 

While Michael and I debated back and forth, Andrew went to have a cig- 
arette on the balcony. As he opened the glass door, all the air seem to be 
sucked out of the room. Outside the window was a ball of lavalike fire, deep 
red flecked with black. We grabbed our shoes and ran in our socks down five 
flights of stairs. The lobby was covered in shattered glass. Around the corner, 
the Mount Lebanon Hotel lay in rubble, along with a neighboring house, 
destroyed by a thousand-pound bomb, making it, at that point, the largest at- 
tack of its kind since the end of the war. 


Andrew ran with his camera to the wreckage; I tried not to, but ended up 
following. After only three hours in Baghdad, I was already breaking my one 
rule: no bomb chasing. Back at the hotel, all the indie reporters and NGO 
types were drinking arak and trying to get their adrenalin under control. 
Everybody kept grinning at me and saying, "Welcome to Baghdad!" I 
glanced at Michael, and we both silently acknowledged that, yes, he had 
won the argument. The last word came from the war itself: "Bombs, not 
journalists, set the agenda here." And they certainly do. They don't just suck 
oxygen into their vortex, they demand everything: our attention, our com- 
passion, our outrage. 

That night I thought about Claudia Acuna, the extraordinary journalist I 
had met in Buenos Aires two years earlier who had given me a copy of 
Rodolfo Walsh's "Open Letter from a Writer to the Military Junta." She had 
warned me that extreme violence has a way of preventing us from seeing the 
interests it serves. In a way, it had happened already to the antiwar move- 
ment. Our explanations for why the war was waged rarely went beyond one- 
word answers: oil, Israel, Halliburton. Most of us chose to oppose the war as 
an act of folly by a president who mistook himself for a king, and his British 
sidekick who wanted to be on the winning side of history. There was little in- 
terest in the idea that war was a rational policy choice, that the architects of 
the invasion had unleashed ferocious violence because they could not crack 
open the closed economies of the Middle East by peaceful means, that the 
level of terror was proportional to what was at stake. 

The invasion of Iraq was sold to the public on the basis of fear of weapons of 
mass destruction because, as Paul Wolfowitz explained, WMDs were "the 
one issue that everyone could agree on" — it was, in other words, the lowest- 
common-denominator excuse. 3 The more rarefied reason, favored by the 
most intellectual proponents of the war, was the "model" theory. According 
to the pundits who advanced this theory, many of them identified as neo- 
cons, terrorism was coming from multiple locations in the Arab and Muslim 
world: the September 11 hijackers were from Saudi Arabia, Egypt, the 
United Arab Emirates and Lebanon; Iran was funding Hezbollah; Syria was 
housing Hamas's leadership; Iraq was sending money to the families of 
Palestinian suicide bombers. For these war advocates, who conflated attacks 
on Israel with attacks on the U.S., as if there were no differences between the 
two, that was enough to qualify the entire region as a potential terrorist 
breeding ground. 


So what was it about this part of the world, they asked, that produced ter- 
rorism? Ideologically blinded from seeing either U.S. or Israeli policies as 
contributing factors, let alone provocations, they identified the true cause as 
something else— the region s deficit in free-market democracy.* 4 

Since the entire Arab world could not be conquered all at once, a single 
country needed to serve as the catalyst. The U.S. would invade that country 
and turn it into, as Thomas Friedman, chief media proselytizer of the theory, 
put it, "a different model in the heart of the Arab-Muslim world," one that in 
turn would set off a series of democratic/neoliberal waves throughout the re- 
gion. Joshua Muravchik, an American Enterprise Institute pundit, forecast 
a "tsunami across the Islamic world" in "Tehran and Baghdad," while the 
archconservative Michael Ledeen, an adviser to the Bush administration, 
described the goal as "a war to remake the world." 15 

Within the internal logic of this theory, fighting terrorism, spreading fron- 
tier capitalism and holding elections were bundled into a single unified 
project. The Middle East would be "cleaned out" of terrorists and a giant 
free-trade zone would be created; then it would all be locked in with after- 
the-fact elections— a sort of three-for-one special. George W. Bush later sim- 
plified this agenda to a single phrase: "spreading freedom in a troubled 
region," and many mistook the sentiment as a starry-eyed commitment to 
democracy. 6 But it was always that other kind of freedom, the one offered to 
Chile in the seventies and to Russia in nineties — the freedom for Western 

* The free-market wave had bypassed this region for several reasons. The richest countries- 
Kuwait, Saudi Arabia, the emirates— were so flush with oil cash that they managed to keep 
out of debt and thus out of the grip of the IMF (84 percent of Saudi Arabia's economy, for in- 
stance, is state controlled). Iraq had a heavy debt, accumulated during the war with Iran, but 
just as the era of globalization was beginning, the first Gulf War ended and Iraq was locked 
away under strict sanctions: not only would there be no "free trade," there would be virtually 
no legal trade at all. 

t The idea that a failure to join the Washington Consensus could be enough to provoke a for- 
eign invasion may seem far-fetched, but there was a precedent. When NATO bombed Bel- 
grade in 1999, the official reason was Slobodan Milosevic's egregious human rights 
violations that had horrified the world. But in a Little-reported revelation years after the 
Kosovo war, Strobe Talbott, deputy secretary of state under President Clinton and the lead 
U.S. negotiator during the war, provided a distinctly less idealistic explanation. "As nations 
throughout the region sought to reform their economies, mitigate ethnic tensions, and 
broaden civil society, Belgrade seemed to delight in continually moving in the opposite direc- 
tion. It is small wonder NATO and Yugoslavia ended up on a collision course. It was Yugo- 
slavia's resistance to the broader trends of political and economic reform— not the plight of 
the Kosovar Albanians— that best explains NATO's war." The revelation came out in a 2005 
book, Collision Course: NATO, Russia, and Kosovo by Talbott's former communications direc- 
tor, John Norris. 



multinationals to feed off freshly privatized states— that was at the center of 
the model theory. The president made that perfectly clear only eight days af- 
ter declaring an end to major combat in Iraq when he announced plans for 
the "establishment of a U.S.-Middle East free trade area within a decade." 7 
Dick Cheney's daughter Liz, a veteran of the Soviet shock therapy adven- 
ture, was put in charge of the project. 

When the idea of invading an Arab country and turning it into a model 
state first gained currency after September 1 1, the names of several possible 
countries were floated— Iraq, Syria, Egypt and, Michael Ledeen's prefer- 
ence, Iran. Iraq had a great deal to recommend it, however. In addition to its 
vast oil reserves, it also made a good central location for military bases now 
that Saudi Arabia looked less dependable, and Saddam's use of chemical 
weapons on his own people made him easy to hate. Another factor, often 
overlooked, was that Iraq had the advantage of familiarity. 

The 1991 Gulf War had been the U.S.'s last major ground offensive in- 
volving hundreds of thousands of troops, and in the twelve years since, the 
Pentagon had been using the battle as a template in workshops, training and 
elaborate war games. One example of this postgame theory was a paper that 
had captured the imagination of Donald Rumsfeld called Shock and Awe: 
Achieving Rapid Dominance. Written by a group of maverick strategists at 
the National Defense University in 1996, the paper positions itself as an all- 
purpose military doctrine, but it is really about refighting the Gulf War. Its 
lead author, the retired navy commander Harlan Ullman, explained that the 
project began when General Chuck Horner, the commander of the air war 
in the 1991 invasion, was asked about his greatest frustration in fighting Sad- 
dam Hussein. He replied that he did not know where to "stick the needle" to 
make the Iraqi army collapse. "Shock and Awe," writes Ullman (who coined 
the phrase) "was intended to address this question: If Desert Storm could be 
refought, how could we win in half the time or less and with far fewer 
forces? . . . The key to its success is finding the entry points for Horner's 
needles— the spots that, when targeted, get an enemy to collapse immedi- 
ately." 8 The authors were convinced that if the U.S. military ever got the 
chance to fight Saddam again, it would now be in a far better position to find 
those "entry points," thanks to new satellite technologies and breakthroughs 
in precision weaponry that would allow it to insert the "needles" with unpre- 
cedented accuracy. 

Iraq had another advantage. While the U.S. military was busy fantasizing 
about refighting Desert Storm with a technological upgrade equivalent to 


"the difference between Atari and PlayStation," as one commentator put it, 
Iraq's military capacity had been hurtling backward, eroded by sanctions 
and virtually disassembled by the United Nations-administered weapons in- 
spection program. 9 That meant that, compared with Iran or Syria, Iraq 
seemed the site for the most winnable war. 

Thomas Friedman was forthright about what it meant for Iraq to be se- 
lected as the model. "We are not doing nation-building in Iraq. We are doing 
nation-creating," he wrote— as if shopping around for a large, oil-rich Arab 
nation to create from scratch was a natural, even "noble" thing to do in the 
twenty-first century. 10 Friedman is among many of the onetime war advo- 
cates who has since claimed that he did not foresee the carnage that would 
follow from the invasion. It's hard to see how he could have missed that de- 
tail. Iraq was not an empty space on a map; it was and remains a culture as 
old as civilization, with fierce anti-imperialist pride, strong Arab nationalism, 
deeply held faiths and a majority of the adult male population with military 
training. If "nation creating" was going to happen in Iraq, what exactly was 
supposed to become of the nation that was already there? The unspoken as- 
sumption from the beginning was that much of it would have to disappear, 
to clear the ground for the grand experiment— an idea that contained, at its 
core, the certainty of extraordinary colonialist violence. 

Thirty years earlier, when the Chicago School counterrevolution took its 
first leap from the textbook to the real world, it also sought to erase nations 
and create new ones in their place. Like Iraq in 2003, Chile in 1973 was 
meant to serve as a model for the entire rebellious continent, and for many 
years it did. The brutal regimes that implemented Chicago School ideas in 
the seventies understood that, for their idealized new nations to be born in 
Chile, Argentina, Uruguay and Brazil, whole categories of people and their 
cultures would need to be pulled up "from the root." 

In the countries that suffered the political cleansings, there have been col- 
lective efforts to come to terms with this violent history— truth commissions, 
excavations of unmarked graves and the beginnings of war crimes trials for the 
perpetrators. But the Latin American juntas did not act alone: they were 
propped up before and after their coups by Washington, as has been amply 
documented. For instance, in 1976, the year of Argentina's coup, when thou- 
sands of young activists were snatched from their homes, the junta had full fi- 
nancial support from Washington. ("If there are things that have to be done, 
you should do them quickly," Kissinger had said.) 11 That year, Gerald Ford 
was president, Dick Cheney was his chief of staff, Donald Rumsfeld was his 


secretary of defense, and Kissinger's executive assistant was an ambitious 
young man named Paul Bremer. These men faced no truth-and-justice pro- 
cess for their roles in supporting the juntas and went on to enjoy long and pros- 
perous careers. So long, in fact, that they would be around three decades later 
to implement a strikingly similar— if far more violent— experiment in Iraq. 

In his 2005 inaugural address, George W. Bush described the era be- 
tween the end of the Cold War and the start of the War on Terror as "years of 
repose, years of sabbatical — and then there came a day of fire." 12 The Iraq in- 
vasion marked the ferocious return to the early techniques of the free-market 
crusade— the use of ultimate shock to forcibly wipe out and erase all obsta- 
cles to the construction of model corporatist states free from all interference. 

Ewen Cameron, the CIA-funded psychiatrist who had tried to "depat- 
tern" his patients by regressing them to infantile states, had believed that if a 
little shock was good for this purpose, more was better. He blasted brains 
with everything he could think of— electricity, hallucinogens, sensory depri- 
vation, sensory overload— anything that would wipe out what was and give 
him a blank slate on which to imprint new thoughts, new patterns. With a 
far larger canvas, that was the invasion and occupation strategy for Iraq. The 
architects of the war surveyed the global arsenal of shock tactics and decided 
to go with all of them— blitzkrieg military bombardment supplemented with 
elaborate psychological operations, followed up with the fastest and most 
sweeping political and economic shock therapy program attempted any- 
where, backed up, if there was any resistance, by rounding up those who re- 
sisted and subjecting them to "gloves-off " abuse. 

Often, in the analyses of the war in Iraq, the conclusion is that the inva- 
sion was a "success" but the occupation was a failure. What this assessment 
overlooks is that the invasion and occupation were two parts of a unified 
stategy— the initial bombardment was designed to erase the canvas on which 
the model nation could be built. 

War as Mass Torture 

For the strategists of the 2003 invasion of Iraq, the answer to the question of 
"where to stick the needles" appears to have been: everywhere. During the 
1991 Gulf War, roughly three hundred Tomahawk cruise missiles were fired 
over the course of five weeks. In 2003, more than three hundred and eighty 
were launched in a single day. Between March 20 and May 2, the weeks of 
"major combat," the U.S military dropped more than thirty thousand bombs 


on Iraq, as well as twenty thousand precision-guided cruise missiles — 67 per- 
cent of the total number ever made. 13 

"I am so scared," Yasmine Musa, a Baghdad mother of three said during 
the bombings. "Not a single minute passes by without hearing and feeling a 
drop of a bomb somewhere. I don't think that a single meter in the whole of 
Iraq is safe." 14 That meant Shock and Awe was doing its job. In open defi- 
ance of the laws of war barring collective punishment, Shock and Awe is a 
military doctrine that prides itself on not merely targeting the enemy's mili- 
tary forces but, as its authors stress, the "society writ large"— mass fear is a 
key part of the strategy. 

Another element that distinguishes Shock and Awe is its acute conscious- 
ness of war as a cable news spectacle, one playing to several audiences at 
once: the enemy, Americans at home and anyone else thinking of making 
trouble. "When the video results of these attacks are broadcast in real time 
worldwide on CNN, the positive impact on coalition support and negative 
impact on potential threat support can be decisive," the Shock and Awe man- 
ual states.* From the start, the invasion was conceived as a message from 
Washington to the world, one spoken in the language of fireballs, deafening 
explosions and city-shattering quakes. In The One Percent Doctrine, Ron 
Suskind explains that for Rumsfeld and Cheney, "the primary impetus for 
invading Iraq" was the desire "to create a demonstration model to guide the 
behavior of anyone with the temerity to acquire destructive weapons or, in 
any way, flout the authority of the United States." Less than a war strategy, it 
was a "global experiment in behaviorism." 15 

Warfare is always partly a performance, always a form of mass communi- 
cation, but Rumsfeld s marshaling of his tech and media know-how from the 
business world put the marketing of fear at the center of U.S. military doc- 
trine. During the Cold War, the fear of a nuclear attack was the core of the 
deterrence strategy, but the idea was for the nuclear missiles to stay in their 
silos. This attack was different: Rumsfeld's war would use everything short of 
a nuclear bomb to put on a show designed to bombard the senses, pull and 
play on emotion, and convey lasting messages, with targets carefully chosen 
for their symbolic value and their made-for-TV impact. In this way, Rums- 
feld's theory of war, part of his project of "transformation," had far less in 
common with the "force-on-force" battlefield strategies of the generals, who 

*The 1 991 Gulf War was the first CNN battle, but since the idea of twenty-four-hour live cov- 
erage was still young, the military had not by then fully incorporated it into its war planning. 


were always slowing him down, and far more in common with the terrorists 
against whom Rumsfeld had declared permanent war. Terrorists don't try to 
win through direct confrontation; they attempt to break public morale with 
spectacular, televisual displays that at once expose their enemy's vulnerabil- 
ity and their own capacity for cruelty. That was the theory behind the 9/1 1 at- 
tacks, just as it was the theory behind the invasion of Iraq. 

Shock and Awe is often presented as merely a strategy of overwhelming fire- 
power, but the authors of the doctrine see it as much more than that: it is, they 
claim, a sophisticated psychological blueprint aimed "directly at the public 
will of the adversary to resist." The tools are ones familiar from another arm of 
the U.S. military complex: sensory deprivation and sensory overload, designed 
to induce disorientation and regression. With clear echoes of the CIA's inter- 
rogation manuals, "Shock and Awe" states, "In crude terms, Rapid Domi- 
nance would seize control of the environment and paralyze or so overload an 
adversary's perceptions and understanding of events." The goal is "rendering 
the adversary completely impotent." This includes such strategies as "real-time 
manipulation of senses and inputs . . . literally 'turning on and off' the 'lights' 
that enable any potential aggressor to see or appreciate the conditions and 
events concerning his forces and ultimately, his society" as well as "depriving 
the enemy, in specific areas, of the ability to communicate, observe." 16 The 
country of Iraq was subjected to this experiment in mass torture for months, 
with the process beginning well before the bombs started falling. 

Fear Up 

When the Canadian citizen Maher Arar was grabbed by U.S. agents at JFK 
airport in 2002 and taken to Syria, a victim of extraordinary rendition, his in- 
terrogators engaged in a tried-and-tested torture technique. "They put me on 
a chair, and one of the men started asking me questions. ... If I did not an- 
swer quickly enough, he would point to a metal chair in the corner and ask, 
'Do you want me to use this?' ... I was terrified, and I did not want to be tor- 
tured. I would say anything to avoid torture." 17 The technique Arar was being 
subjected to is known as "the showing of the instruments," or, in U.S. mili- 
tary lingo, "fear up." Torturers know that one of their most potent weapons is 
the prisoner's own imagination — often just showing fearsome instruments is 
more effective than using them. 

As the day of the invasion of Iraq drew closer, U.S. news media outlets 
were conscripted by the Pentagon to "fear up" Iraq. "They're calling it 'A-Day,' " 


began a report on CBS News that aired two months before the war began. 
" 'A' as in airstrikes so devastating they would leave Saddam's soldiers unable 
or unwilling to fight." Viewers were introduced to Harlan Ullman, a Shock 
and Awe author, who explained that "you have this simultaneous effect, 
rather like the nuclear weapons at Hiroshima, not taking days or weeks but 
in minutes." The anchor, Dan Rather, ended the telecast with a disclaimer: 
"We assure you this report contains no information that the Defense De- 
partment thinks could help the Iraqi military." 18 He could have gone further: 
the report, like so many others in this period, was an integral part of the De- 
partment of Defense's strategy— fear up. 

Iraqis, who picked up the terrifying reports on contraband satellites or in 
phone calls from relatives abroad spent months imagining the horrors of 
Shock and Awe. The phrase itself became a potent psychological weapon. 
Would it be worse than 1991? If the Americans really thought Saddam had 
WMDs, would they launch a nuclear attack? 

One answer was provided a week before the invasion. The Pentagon in- 
vited Washington's military press corps on a special field trip to Eglin Air 
Force Base in Florida to witness the testing of the MOAB, which officially 
stands for Massive Ordnance Air Blast but which everyone in the military 
calls the "Mother of All Bombs." At twenty-one thousand pounds, it is the 
largest nonnuclear explosive ever built, able to create, in the words of CNN's 
Jamie Mclntyre, "a ten-thousand-foot-high mushroom-like cloud that looks 
and feels like a nuclear weapon." 19 

In his report, Mclntyre said that even if it was never used, the bomb's very 
existence "could still pack a psychological wallop"— a tacit acknowledgment 
of the role he himself was playing in delivering that wallop. Like prisoners in 
interrogation cells, Iraqis were being shown the instruments. "The goal is to 
have the capabilities of the coalition so clear and so obvious that there's an 
enormous disincentive for the Iraqi military to fight," Rumsfeld explained on 
the same program. 20 

When the war began, the residents of Baghdad were subjected to sensory 
deprivation on a mass scale. One by one, the city's sensory inputs were cut 
off; the ears were the first to go. 

On the night of March 28, 2003, as U.S. troops drew closer to Baghdad, 
the ministry of communication was bombed and set ablaze, as were four 
Baghdad telephone exchanges, with massive bunker-busters, cutting off mil- 
lions of phones across the city. The targeting of the phone exchanges 


continued— twelve in total — until, by April 2, there was barely a phone 
working in all of Baghdad.* 21 During the same assault, television and radio 
transmitters were also hit, making it impossible for families in Baghdad, hud- 
dling in their homes, to pick up even a weak signal carrying news of what 
was going on outside their doors. 

Many Iraqis say that the shredding of their phone system was the most psy- 
chologically wrenching part of the air attack. The combination of hearing 
and feeling bombs going off everywhere while being unable to call a few 
blocks away to find out if loved ones were alive, or to reassure terrified rela- 
tives living abroad, was pure torment. Journalists based in Baghdad were 
swarmed by desperate local residents begging for a few moments with their 
satellite phones or pressing numbers into the reporters' hands along with 
pleas to call a brother or an uncle in London or Baltimore. "Tell him every- 
thing is okay. Tell him his mother and father are fine. Tell him hello. Tell 
him not to worry." 22 By then, most drugstores in Baghdad had sold out of 
sleeping aids and antidepressants, and the city was completely cleaned out of 

Next to go were the eyes. "There was no audible explosion, no discernible 
change in the early evening bombardments, but in an instant, an entire city 
of 5 million people was plunged into an awful, endless night," The Guardian 
reported on April 4. Darkness was "relieved only by the headlights of passing 
cars." 23 Trapped in their homes, Baghdad's residents could not speak to each 
other, hear each other or see outside. Like a prisoner destined for a CIA 
black site, the entire city was shackled and hooded. Next it was stripped. 

Comfort Items 

In hostile interrogations, the first stage of breaking down prisoners is strip- 
ping them of their own clothes and any items that have the power to evoke 
their sense of self— so-called comfort items. Often objects that are of partic- 
ular value to a prisoner, like the Koran or a cherished photograph, are treated 

* The official reason for the wholesale annihilation of Baghdad's phone system was to sever 
Saddam's ability to communicate with his elite commandos. But after the war, U.S. inter- 
rogators conducted extensive "interviews" with top Iraqi prisoners and discovered that for 
years Saddam had been convinced that spies were tracking him through his phone calls and 
therefore had used a phone only twice in the previous thirteen years. As usual, reliable intel- 
ligence wasn't necessary; there would be plenty of ready money for Bechtel to build a new 


with open disrespect. The message is "You are no one, you are who we want 
you to be ," the essence of dehumanization. Iraqis went through this unmak- 
ing process collectively, as they watched their most important institutions 
desecrated, their history loaded onto trucks and disappeared. The bombing 
badly injured Iraq, but it was the looting, unchecked by occupying troops, 
that did the most to erase the heart of the country that was. 

"The hundreds of looters who smashed ancient ceramics, stripped display 
cases and pocketed gold and other antiquities from the National Museum of 
Iraq pillaged nothing less than records of the first human society," reported 
the Los Angeles Times. "Gone are 80 per cent of the museum's 170,000 
priceless objects." 24 The national library, which contained copies of every 
book and doctoral thesis ever published in Iraq, was a blackened ruin. 
Thousand-year-old illuminated Korans had disappeared from the Ministry of 
Religious Affairs, which was left a burned-out shell. "Our national heritage is 
lost," pronounced a Baghdad high-school teacher. 25 A local merchant said of 
the museum, "It was the soul of Iraq. If the museum doesn't recover the 
looted treasures, I will feel like a part of my own soul has been stolen." 
McGuire Gibson, an archaeologist at the University of Chicago, called it "a 
lot like a lobotomy. The deep memory of an entire culture, a culture that has 
continued for thousands of years, has been removed." 26 

Thanks mostly to the efforts of clerics who organized salvage missions in 
the midst of the looting, a portion of the artifacts has been recovered. But 
many Iraqis were, and still are, convinced that the memory lobotomy was 
intentional— part of Washington's plans to excise the strong, rooted nation 
that was and replace it with their own model. "Baghdad is the mother of Arab 
culture," seventy-year-old Ahmed Abdullah told The Washington Post, "and 
they want to wipe out our culture." 27 

As the war planners were quick to point out, the looting was done by 
Iraqis, not foreign troops. And it's true that Rumsfeld did not plan for Iraq to 
be sacked— but he did not take measures to prevent it from happening ei- 
ther, or to stop it once it had begun. These were failures that cannot be dis- 
missed as mere oversights. 

During the 1991 Gulf War, thirteen Iraqi museums were attacked by loot- 
ers, so there was every reason to believe that poverty, anger at the old regime 
and the general atmosphere of chaos would prompt some Iraqis to respond 
in the same way (especially given that Saddam had emptied the prisons several 
months earlier). The Pentagon had been warned by leading archaeologists 


that it needed to have an airtight strategy to protect museums and libraries 
before any attack, and a March 26 Pentagon memo to coalition command 
listed "in order of importance, 16 sites that were crucial to protect in Bagh- 
dad." Second on the list was the museum. Other warnings had urged Rums- 
feld to send an international police contingent in with the troops to maintain 
public order— another suggestion that was ignored. 28 

Even without the police, however, there were enough U.S. soldiers in 
Baghdad for a few to be dispatched to the key cultural sites, but they weren't 
sent. There are numerous reports of U.S. soldiers hanging out by their ar- 
mored vehicles and watching as trucks loaded with loot drove by— a reflec- 
tion of the "stuff happens" indifference coming straight from Rumsfeld. 
Some units took it upon themselves to stop the looting, but in other in- 
stances, soldiers joined in. The Baghdad International Airport was com- 
pletely trashed by soldiers who, according to Time, smashed furniture and 
then moved on to the commercial jets on the runway: "U.S. soldiers looking 
for comfortable seats and souvenirs ripped out many of the planes' fittings, 
slashed seats, damaged cockpit equipment and popped out every wind- 
shield." The result was an estimated $100 million worth of damage to Iraq's 
national airline — which was one of the first assets to be put on the auction 
block in an early and contentious partial privatization. 29 

Some insight into why there was so little official interest in stopping the 
looting has since been provided by two men who played pivotal roles in the 
occupation — Peter McPherson, the senior economic adviser to Paul Bremer, 
and John Agresto, director of higher education reconstruction for the occu- 
pation. McPherson said that when he saw Iraqis taking state property— cars, 
buses, ministry equipment— it didn't bother him. His job, as Iraq's top eco- 
nomic shock therapist, was to radically downsize the state and privatize its as- 
sets, which meant that the looters were really just giving him a jump-start "I 
thought the privatization that occurs sort of naturally when somebody took 
over their state vehicle, or began to drive a truck that the state used to own, 
was just fine," he said. A veteran bureaucrat of the Reagan administration 
and a firm believer in Chicago School economics, McPherson termed the 
pillage a form of public sector "shrinkage,"* 30 

* Its a spin that puts Halliburton's overcharging of U.S. taxpayers and the Pentagon's will- 
ingness to let it slide in a new light— perhaps the Department of Defense saw the missing 
millions not as theft but as shrinkage, all part of the campaign to scale back government and 
beef up business. 


His colleague John Agresto also saw a silver lining as he watched the loot- 
ing of Baghdad on TV. He envisioned his job— "a never to be repeated 
adventure"— as the remaking of Iraq's system of higher education from 
scratch. In that context, the stripping of the universities and the education 
ministry was, he explained, "the opportunity for a clean start," a chance to 
give Iraq's schools "the best modem equipment." If the mission was "nation 
creating," as so many clearly believed it to be, then everything that remained 
of the old country was only going to get in the way. Agresto was the former 
president of St. John's College in New Mexico, which specializes in a Great 
Books curriculum. He explained that although he knew nothing of Iraq, he 
had refrained from reading books about the country before making the trip 
so that he would arrive "with as open a mind as I could have." 31 Like Iraq's 
colleges, Agresto would be a blank slate. 

If Agresto had read a book or two, he might have thought twice about the 
need to erase everything and start over. He could have learned, for instance, 
that before the sanctions strangled the country, Iraq had the best education 
system in the region, with the highest literacy rates in the Arab world— in 
1985, 89 percent of Iraqis were literate. By contrast, in Agresto 's home state 
of New Mexico, 46 percent of the population is functionally illiterate, and 20 
percent are unable do "basic math to determine the total on a sales re- 
ceipt."* 32 Yet Agresto was so convinced of the superiority of American sys- 
tems that he seemed unable to entertain the possibility that Iraqis might want 
to salvage and protect their own culture and that they might feel its destruc- 
tion as a wrenching loss. 

This neocolonialist blindness is a running theme in the War on Terror. At 
the U.S. -run prison at Guantanamo Bay, there is a room known as "the love 
shack." Detainees are taken there after their captors have decided they are 
not enemy combatants and will soon be released. Inside the love shack, pris- 
oners are allowed to watch Hollywood movies and are plied with American 
junk food. Asif Iqbal, one of three British detainees known as the "Tipton 
Three," was permitted several visits there before he and his two friends were 
finally sent home. "We would get to watch DVDs, eat McDonald's, eat Pizza 
Hut and basically chill out. We were not shackled in this area. . . . We had 
no idea why they were being like that to us. The rest of the week we were 

* When Agresto failed miserably at his job of rebuilding Iraq's university system, leaving the 
country with the job undone, he revised his early enthusiasm for looting, describing himself 
as "a neoconservative who's been mugged by reality." This and other details come from Ra- 
jiv Chandrasekaran's vivid account of the Green Zone, Imperial Life in the Emerald City. 


back in the cages as usual. . . . On one occasion Lesley [an FBI official] 
brought Pringles, ice cream and chocolates, this was the final Sunday before 
we came back to England." His friend Rhuhel Ahmed speculated that the 
special treatment "was because they knew they had messed us about and tor- 
tured us for two and half years and they hoped we would forget it." 33 

Ahmed and Iqbal had been grabbed by the Northern Alliance while visit- 
ing Afghanistan on their way to a wedding. They had been violently beaten, 
injected with unidentified drugs, put in stress positions for hours, sleep de- 
prived, forcibly shaven and denied all legal rights for twenty-nine months. 34 
And yet they were supposed to "forget it" in the face of the overwhelming al- 
lure of Pringles. That was actually the plan. 

It's hard to believe— but then again, that was pretty much Washington's 
game plan for Iraq: shock and terrorize the entire country, deliberately ruin 
its infrastructure, do nothing while its culture and history are ransacked, 
then make it all okay with an unlimited supply of cheap household appli- 
ances and imported junk food. In Iraq, this cycle of culture erasing and cul- 
ture replacing was not theoretical; it all unfolded in a matter of weeks. 

Paul Bremer, appointed by Bush to serve as director of the occupation au- 
thority in Iraq, admits that when he first arrived in Baghdad, the looting was 
still going strong and order was far from restored. "Baghdad was on fire, liter- 
ally, as I drove in from the airport. . . . There was no traffic on the streets; there 
was no electricity anywhere; no oil production; no economic activity; there 
wasn't a single policeman on duty anywhere." And yet his solution to this crisis 
was to immediately fling open the country's borders to absolutely unrestricted 
imports: no tariffs, no duties, no inspections, no taxes. Iraq, Bremer declared 
two weeks after he arrived, was "open for business." 35 Overnight, Iraq went 
from being one of the most isolated countries in the world, sealed off from the 
most basic trade by strict UN sanctions, to becoming the widest-open market 

While the pickup trucks stuffed with loot were still being driven to buyers 
in Jordan, Syria and Iran, passing them in the opposite direction were con- 
voys of flatbeds piled high with Chinese TVs, Hollywood DVDs and Jordan- 
ian satellite dishes, ready to be unloaded on the sidewalks of Baghdad's 
Karada district. Just as one culture was being burned and stripped for parts, 
another was pouring in, prepackaged, to replace it. 

One of the U.S. businesses ready and waiting to be the gateway to this ex- 
periment in frontier capitalism was New Bridge Strategies, started by Joe 
Allbaugh, Bush's ex-head of FEMA. It promised to use its top-level political 


connections to help U.S. multinationals land a piece of the action in Iraq. 
"Getting the rights to distribute Procter & Gamble products would be 
a gold mine," one of the company's partners enthused. "One well-stocked 
7-Eleven could knock out 30 Iraqi stores; a Wal-Mart could take over the 
country." 36 

Like the prisoners in Guantanamo's love shack, all of Iraq was going to be 
bought off with Pringles and pop culture— that, at least, was the Bush ad- 
ministration's idea of a postwar plan. 




The world is a messy place, and someone has to clean it up. 

— CondoLeezza Rice, September 2002, on the need to invade Iraq 1 

Bush's capacity to imagine a different Middle East may actually be 
related to his relative ignorance of the region. Had he traveled to 
the Middle East and seen its many dysfunctions, he might have 
been disheartened. Freed from looking at the day-to-day realities, 
Bush maintained a vision of what the region could look like. 
— Fareed Zakaria, Newsweek columnist 2 

And the one who was seated on the throne said, "See, I am making 
all things new." Also he said, "Write this, for these words are 
trustworthy and true." 

-Revelation 21:5 (NRSV) 

The war in Iraq has been in damage control mode for so long that it's easy to 
forget the original vision for the way it was supposed to work out. But there 
was a vision, one neatly encapsulated at a conference held by the U.S. State 
Department in Baghdad in the early months of the occupation. The gather- 
ing featured fourteen high-level politicians and bureaucrats from Russia and 
Eastern Europe— an assortment of finance ministers, central bank chiefs 
and former deputy prime ministers. They were flown to the Baghdad Inter- 
national Airport in September 2003, kitted out in combat helmets and body 
armor, then raced to the Green Zone, the walled city within a city that 


housed the U.S.-run government of Iraq, the Coalition Provisional Authority 
(CPA), and now houses the U.S. embassy. Inside Saddam's former confer- 
ence center, the VIP guests gave a small group of influential Iraqis lessons in 
capitalist transformation. 

One of the main speakers was Marek Belka, Poland's former right-wing fi- 
nance minister who worked under Bremer in Iraq for several months. Ac- 
cording to an official State Department report on the gathering, Belka 
pounded the Iraqis with the message that they had to seize this moment of 
chaos to be "forceful" in pushing through policies that "would throw many 
people out of work." The first lesson from Poland, Belka said, was that "un- 
productive state-owned enterprises should be sold off immediately without 
efforts to salvage them with public funds." (He failed to mention that popu- 
lar pressure had forced Solidarity to abandon its plans for rapid privatization, 
saving Poland from a Russian-style meltdown.) His second lesson was even 
bolder. It was five months after the fall of Baghdad, and Iraq was in the midst 
of a humanitarian emergency. Unemployment was at 67 percent, malnutri- 
tion was rampant and the only thing holding off mass starvation was the fact 
that Iraqi households still received government-subsidized food and other es- 
sentials, just as they had under the UN-administered oil-for-food program 
during the sanctions period. They were also able to fill their gas tanks for 
pennies, when gas was available. Belka told the Iraqis that these market- 
distorting giveaways had to be scrapped immediately. "Develop the private 
sector, starting with the elimination of subsidies." He stressed that these mea- 
sures were "much more important and divisive than privatization." 3 

Next up was none other than Yegor Gaidar, Yeltsin's former deputy prime 
minister, regarded as the architect of Russia's shock therapy program. In invit- 
ing Gaidar to come to Baghdad, the State Department seems to have as- 
sumed that the Iraqis would not know that he was regarded as a pariah back in 
Moscow, tainted by his close association with the oligarchs and by policies 
that had impoverished tens of millions of Russians.* While it was true that un- 
der Saddam the Iraqis had only limited access to outside news, the people 
at the Green Zone conference were mostly recently returned exiles; in the 

* Many of the key players in Iraq's invasion and occupation were veterans of the original team 
in Washington that had demanded shock therapy in Russia: Dick Cheney was defense secre- 
tary when George Bush Sr. crafted his post-Soviet Russia policy, and Paul Wolfowitz was 
Cheney's deputy, while Condoleezza Rice served as Bush Sr.'s chief adviser on Russia's tran- 
sition. For all these top players, and dozens of lesser ones, Russia's experience in the 
nineties, despite its abysmal results for ordinary people, was often invoked, without irony, as 
the model for Iraq to emulate in its transition. 


nineties, while Russia was imploding, they were reading The International 
Herald Tribune. 

It was Mohamad Tofiq, Iraq's interim industry minister, who told me about 
this strange conference, which wasn't covered in the press at the time. Months 
later, when we met in his temporary office in Baghdad (the old ministry was a 
charred shell), Tofiq was still laughing about it. He said the Iraqis had blasted 
the flak-jacket-wearing visitors, informing them that Paul Bremer's decision to 
fling open the borders to unrestricted imports had already dramatically wors- 
ened the lives of a war-ravaged people — if it was pushed further by cutting gas 
subsidies and eliminating food aid, the occupation would have a revolution on 
its hands. As for the star speaker, Tofiq said, "I told some of the people who or- 
ganized the conference that if I was to encourage privatization in Iraq, I'd 
bring Gaidar to tell them, 'Do exactly the opposite of what we did/ " 

When Bremer started issuing legal decrees in Baghdad, Joseph Stiglitz, the 
former World Bank chief economist, warned that Iraq was getting "an even 
more radical form of shock therapy than pursued in the former Soviet 
world." That was quite true. In the original Washington plan, Iraq was going 
to become a frontier just as Russia had been in the early nineties, but this 
time it would be U.S. firms— not local ones or European, Russian or Chi- 
nese competitors— that would be first in line for the easy billions. And noth- 
ing would deter even the most painful economic changes because, in 
contrast to the former Soviet Union, or Latin America and Africa, the trans- 
formation would not involve a mannered dance between IMF officials and 
quixotic local politicians while the U.S. Treasury called the shots from the 
suite down the hall. In Iraq, Washington cut out the middlemen: the IMF 
and the World Bank were relegated to supporting roles, and the U.S. was 
front and center. Paul Bremer was the government; as a top U.S. military of- 
ficial told the Associated Press, there was no point in negotiating with the lo- 
cal government because "at this point, we'd be negotiating with ourselves." 4 
This dynamic was what set the economic transformation of Iraq apart 
from earlier laboratories. All the careful efforts during the nineties to present 
"free trade" as something other than an imperial project were abandoned. 
Elsewhere, there would still be free trade lite, with its hothouse negotiations, 
but now there would also be free trade heavy, without proxies or puppets, 
seizing new markets directly for Western multinationals on the battlefields of 
preemptive wars. 

The proponents of the "model theory" now claim that this was where their 


war went horribly wrong— as Richard Perle said in late 2006, "the seminal 
mistake" was "bringing Bremer in." David Frum concurred, saying they 
should have had "any kind of an Iraqi face" on the remaking of Iraq right 
away. 5 Instead they had Paul Bremer, ensconced in Saddam's turquoise- 
domed Republican Palace, receiving trade and investment laws by e-mail 
from the Department of Defense, printing them out, signing them and im- 
posing them by fiat on the Iraqi people. Bremer was no quiet American, ma- 
neuvering and manipulating behind the scenes. With his movie-of-the-week 
looks and his fondness for news crews, he seemed intent on flaunting his ab- 
solute power over Iraqis, crisscrossing the country in a flashy Blackhawk heli- 
copter flanked by GI Joe private security guards from Blackwater and always 
in his trademark uniform: immaculately pressed Brooks Brothers suits and 
beige Timberland boots. The boots were a going-to-Baghdad present from 
his son; "Go kick some butt, Dad," the card had said. 6 

By his own admission, Bremer knew little of Iraq ("I had lived in 
Afghanistan," he told one interviewer). That ignorance hardly mattered, 
however, because if there was one thing Bremer knew a great deal about, it 
was the central mission in Iraq: disaster capitalism. 7 

On September 11, 2001, he had been working as managing director and 
"senior political adviser" at the insurance giant Marsh & McLennan. The 
company had its offices in the North Tower of the World Trade Center and 
was devastated by the attacks. In the first few days, 700 of its workers were un- 
accounted for; in the end, 295 were confirmed dead. Exactly one month 
later, on October 11, 2001, Paul Bremer launched Crisis Consulting Prac- 
tice, a new division of Marsh specializing in helping multinational corpora- 
tions prepare for possible terrorist attacks and other crises. Advertising his 
experience as ambassador-at-large for counterterrorism under the Reagan ad- 
ministration, Bremer and his company offered clients comprehensive coun- 
terterrorism services, from political risk insurance to public relations and 
even advice on what to stockpile. 8 

Bremer's vanguard participation in the homeland security industry was 
ideal preparation for Iraq. That's because the Bush administration used the 
same formula to rebuild Iraq that it had pioneered to respond to 9/11: it 
treated postwar Iraq as if it was an exciting IPO, brimming with free- 
wheeling, quick-profit potential. So while Bremer may have stepped on 
plenty of toes, his mission never was to win Iraqi hearts and minds. Rather, it 
was to get the country ready for the launch of Iraq Inc. Seen in that light, his 
early, much-maligned decisions have an unmistakable logical coherence. 


After replacing the cautious general Jay Garner as the top U.S. envoy, Bre- 
mer spent his first four months in Iraq almost exclusively focused on economic 
transformation, passing a series of laws that together make up a classic Chicago 
School shock therapy program. Before the invasion, Iraq's economy had been 
anchored by its national oil company and by two hundred state-owned com- 
panies, which produced the staples of the Iraqi diet and the raw materials of its 
industry, everything from cement to paper and cooking oil. The month after 
he arrived in his new job, Bremer announced that the two hundred firms were 
going to be privatized immediately. "Getting inefficient state enterprises into 
private hands/' Bremer said, "is essential for Iraq's economic recovery." 9 

Next came the new economic laws. To entice foreign investors to take part 
in the privatization auction and to build new factories and retail outlets in 
Iraq, Bremer enacted a radical set of laws described by The Economist in 
glowing terms as the "wish-list that foreign investors and donor agencies 
dream of for developing markets." 10 One law lowered Iraq's corporate tax 
rate from roughly 45 percent to a flat 1 5 percent (straight out of the Milton 
Friedman playbook). Another allowed foreign companies to own 100 per- 
cent of Iraqi assets— preventing a repeat of Russia, where the prizes went to 
the local oligarchs. Even better, investors could take 100 percent of the prof- 
its they made in Iraq out of the country; they would not be required to rein- 
vest, and they would not be taxed. The decree also stipulated that investors 
could sign leases and contracts that would last for forty years and then be el- 
igible for renewal, which meant that future elected governments would be 
saddled with deals signed by their occupiers. The one area on which Wash- 
ington held back was oil: its Iraqi advisers warned that any move to privatize 
the state oil company or to lay claim to untapped reserves before an Iraqi 
government was in place would be seen as an act of war. But the occupation 
authority did take possession of $20 billion worth of revenues from Iraq's na- 
tional oil company, to spend as it wished.* 11 

The White House was so focused on unveiling a shiny new Iraqi economy 
that it decided, in the early days of the occupation, to launch a brand-new 

* Some $8.8 billion of this money is often referred to as "Iraq's missing billions" because it 
disappeared into U.S. -controlled Iraqi ministries in 2004, virtually without a trace. Bremer 
defended this lax oversight to a U.S. congressional committee in February 2007, saying: "Our 
top priority was to get the economy moving again. The first step was to get money into the 
hands of the Iraqi people as quickly as possible." When Bremer's financial adviser, the re- 
tired admiral David Oliver, was asked by the committee about the missing billions, he 
replied, "Yeah, I understand. I'm saying what difference does it make?" 


currency, a massive logistical undertaking. The U.K. firm De La Rue did the 
printing, and bills were delivered in fleets of planes and distributed in ar- 
mored vehicles and trucks that ran at least a thousand missions throughout 
the country— at a time when 50 percent of the people still lacked drinking 
water, the traffic lights weren't working and crime was rampant. 12 

Although it was Bremer who implemented these plans, the priorities were 
coming straight from the top. Testifying before a Senate committee, Rums- 
feld described Bremer's "sweeping reforms" as creating "some of the most 
enlightened— and inviting— tax and investment laws in the free world." At 
first, investors seemed to appreciate the effort. Within a few months, there 
was talk of a McDonald's opening in downtown Baghdad— the ultimate 
symbol of Iraq joining the global economy— funding was almost in place for 
a Starwood luxury hotel, and General Motors was planning to build an auto 
plant. On the financial side, HSBC, the international bank headquartered in 
London, was awarded a contract to open branches all over Iraq, while Citi- 
group announced plans to offer substantial loans guaranteed against future 
sales of Iraqi oil. The oil majors— Shell, BP, ExxonMobil, Chevron and Rus- 
sia's Lukoil — made tentative approaches, signing agreements to train Iraqi 
civil servants in the latest extraction technologies and management models, 
confident that their time would soon arrive. 13 

Bremer's laws, designed to create the conditions for an investor frenzy, 
were not exactly original— they were merely an accelerated version of what 
had been implemented in previous shock therapy experiments. But Bush's 
disaster capitalism cabinet was not content to wait for the laws to take effect. 
Where the Iraq experiment entered bold new terrain was that it transformed 
the invasion, occupation and reconstruction into an exciting, fully priva- 
tized new market. This market was created, just as the homeland security 
complex was, with a huge pot of public money. For reconstruction alone, 
the boom was kicked off with $38 billion from the U.S. Congress, $15 billion 
from other countries and $20 billion of Iraq's own oil money. 14 

When the initial billions were announced, there were, inevitably, lauda- 
tory comparisons with the Marshall Plan. Bush invited the parallels, declar- 
ing the reconstruction "the greatest financial commitment of its kind since 
the Marshall Plan," and stating in a televised address in the early months of 
the occupation that "America has done this kind of work before. Following 
World War II, we lifted up the defeated nations of Japan and Germany, and 
stood with them as they built representative governments." 15 

What happened to the billions earmarked for Iraq's reconstruction, how- 


ever, bore no relationship to the history Bush invoked. Under the original 
Marshall Plan, American firms benefited by sending equipment and food to 
Europe, but the explicit goal was to help war-torn economies recover as self- 
sufficient markets, creating local jobs and developing tax bases capable of 
funding domestic social services— the results of which are in evidence in 
Germany's and Japan s mixed economies today. 

The Bush cabinet had in fact launched an anti-Marshall Plan, its mirror 
opposite in nearly every conceivable way. It was a plan guaranteed from the 
start to further undermine Iraq's badly weakened industrial sector and to 
send Iraqi unemployment soaring. Where the post-Second World War plan 
had barred foreign firms from investing, to avoid the perception that they 
were taking advantage of countries in a weakened state, this scheme did 
everything possible to entice corporate America (with a few bones tossed to 
corporations based in countries that joined the "Coalition of the Willing"). It 
was this theft of Iraq's reconstruction funds from Iraqis, justified by unques- 
tioned, racist assumptions about U.S. superiority and Iraqi inferiority— and 
not merely the generic demons of "corruption" and "inefficiency" — that 
doomed the project from the start. 

None of the money went to Iraqi factories so they could reopen and form 
the foundation of a sustainable economy, create local jobs and fund a social 
safety net. Iraqis had virtually no role in this plan at all. Instead, the U.S. fed- 
eral government contracts, most of them issued by USAID, commissioned a 
kind of country-in-a-box, designed in Virginia and Texas, to be assembled in 
Iraq. It was, as the occupation authorities repeatedly said, "a gift from the 
people of the United States to the people of Iraq" — all Iraqis needed to do 
was unwrap it. 16 Even Iraqis' low-wage labor wasn't required for the assembly 
process because the major U.S. contractors such as Halliburton, Bechtel and 
the California-based engineering giant Parsons preferred to import foreign 
workers whom they felt confident they could control. Once again Iraqis were 
cast in the role of awed spectators— first awed by U.S. military technology 
and then by its engineering and management prowess. 

As in the homeland security industry, the role for government employees — 
even U.S. government employees— was cut to the bone. Bremer's staff was a 
mere fifteen hundred people to govern a sprawling country of 25 million. By 
contrast, Halliburton had fifty thousand workers in the region, many of them 
lifelong public servants lured into the private sector by offers of better salaries. 17 

The weak public presence and the robust corporate one reflected the fact 
that the Bush cabinet was using Iraq's reconstruction (over which it had 


complete control, in contrast to the federal bureaucracy back home) to im- 
plement its vision of a fully outsourced, hollow government. In Iraq, there 
was not a single governmental function that was considered so "core" that it 
could not be handed to a contractor, preferably one who provided the Re- 
publican Party with financial contributions or Christian foot soldiers during 
election campaigns. The usual Bush motto governed all aspects of the for- 
eign forces' involvement in Iraq: if a task could be performed by a private en- 
tity, it must be. 

So while Bremer may have signed the laws, it was private accountants who 
designed and managed the economy. (BearingPoint, an offshoot of the major 
international accounting and consulting firm KPMG, was paid $240 million 
to build a "market-driven system" in Iraq— the 107-page contract mentions 
the word "privatization" fifty-one times; much of the original contract was 
written by BearingPoint.) Think tanks were paid to think (Britain's Adam 
Smith Institute was contracted to help privatize Iraq's companies). Private se- 
curity firms and defense contractors trained Iraq's new army and police (Dyn- 
Corp, Vinnell and the Carlyle Group's USIS, among others). And education 
companies drafted the post-Saddam curriculum and printed the new text- 
books. (Creative Associates, a management-and-education-consulting firm 
based in Washington, D.C., was given contracts worth more than $100 mil- 
lion for these tasks.)* 18 

Meanwhile, the model pioneered by Cheney for Halliburton in the 
Balkans, where bases were transformed into mini Halliburton towns, was 
adopted on a vastly larger scale. In addition to Halliburton's construction 
and management of military bases across the country, the Green Zone was, 
from the start, a Halliburton-run city-state, with the company in charge of 
everything from road maintenance to pest control to movie and disco nights. 

The CPA was far too understaffed to monitor all the contractors, and be- 
sides, the Bush administration saw oversight as a noncore function to be out- 
sourced. The Colorado-based engineering and construction company 
CH2M Hill was paid $28.5 million in a joint venture with Parsons to oversee 
four other major contractors. Even the job of building "local democracy" was 
privatized, given to the North Carolina-based Research Triangle Institute in 
a contract worth up to $466 million, though it's not at all clear what qualified 

* Ahmed al-Rahim, an Iraqi American who worked with Creative Associates, explained, "The 
initial idea was that we would write a curriculum and bring it into Iraq." As it turned out, 
Iraqis complained that "something packaged in America was not acceptable, and it was 


RTI to bring democracy to a Muslim country. The leadership of the com- 
pany's Iraq operation was dominated by high-level Mormons— people like 
James Mayfield, who told his mission back in Houston that he thought Mus- 
lims could be persuaded to embrace the Book of Mormon as compatible with 
the teachings of the prophet Muhammad. In an e-mail home, he imagined 
that Iraqis would erect a statue to him as their "founder of democracy "* 19 

As these foreign corporations descended on the country, the machinery in 
Iraq's two hundred state firms stood still, frozen by chronic power blackouts. 
Iraq once had one of the most sophisticated industrial economies in the re- 
gion; now its largest firms couldn't even get a subsubsubcontract in their own 
country's reconstruction. To participate in the gold rush at all, Iraqi firms 
would have needed emergency generators and some basic repairs— which 
should not have been insurmountable, given Halliburton's speed in building 
military bases that look like Midwestern suburbs. 

Mohamad Tofiq at the Industry Ministry told me he had made repeated re- 
quests for generators, pointing out that Iraq's seventeen state-owned cement 
factories were perfectly positioned both to supply the reconstruction effort 
with building materials and to put tens of thousands of Iraqis to work. The fac- 
tories received nothing— no contracts, no generators, no help. American com- 
panies preferred to import their cement, like their workforce, from abroad, at 
up to ten times the price. One of Bremer's economic edicts specifically pro- 
hibited Iraq's central bank from offering financing to state-owned enterprises 
(a fact not reported until years later). 20 The reason for this effective boycott of 
Iraqi industry was not practical, Tofiq told me, but ideological. Among those 
making the decisions, he said, "no one believes in the public sector." 

While private Iraqi firms closed in droves, unable to compete with im- 
ports streaming across the open borders, Bremer's staff had few comforting 
words to offer. Addressing a gathering of Iraqi businessmen, Michael Fleis- 
cher, one of Bremer's deputies, confirmed that many of their businesses 
would indeed fail in the face of foreign competition, but that was the beauty 
of the free market. "Will you be overwhelmed by foreign businesses?" he 
asked rhetorically. "The answer depends on you. Only the best of you will 
survive." He sounded like Yegor Gaidar, who reportedly said of small Rus- 
sian businesses going under as a result of shock therapy, "So what? One who 
is dying deserves to die." 21 

* In fact, RTI was driven out of the country after it helped block local IsLamic parties from 
democratically taking power in several cities and towns. 


As is now well known, nothing about Bush's anti-Marshall Plan went as in- 
tended. Iraqis did not see the corporate reconstruction as "a gift"; most saw it 
as a modernized form of pillage, and U.S. corporations didn't wow anyone 
with their speed and efficiency; instead they have managed to turn the word 
"reconstruction" into, as one Iraqi engineer put it, "a joke that nobody 
laughs at." 22 Each miscalculation provoked escalating levels of resistance, 
answered with counterrepression by foreign troops, ultimately sending the 
country spiraling into an inferno of violence. As of July 2006, according to 
the most credible study, the war in Iraq had taken the lives of 655,000 Iraqis 
who would not have died had there been no invasion or occupation. 23 

In November 2006, Ralph Peters, a retired U.S. Army officer, wrote in 
USA Today that "we did give the Iraqis a unique chance to build a rule-of- 
law democracy," but Iraqis "preferred to indulge in old hatreds, confessional 
violence, ethnic bigotry and a culture of corruption. It appears that the cyn- 
ics were right: Arab societies can't support democracy as we know it. And 
people get the government they deserve. . . . The violence staining Bagh- 
dad's streets with gore isn't only a symptom of the Iraqi government's incom- 
petence, but of the comprehensive inability of the Arab world to progress in 
any sphere of organized human endeavor. We are witnessing the collapse of 
a civilization." 24 Though Peters was particularly blunt, many Western ob- 
servers have arrived at the same verdict: blame the Iraqis. 

But the sectarian divisions and religious extremism engulfing Iraq cannot 
be neatly detached from the invasion and the occupation. Although these 
forces were certainly present in advance of the war, they were far weaker be- 
fore Iraq was turned into a U.S. shock lab. It's worth remembering that in 
February 2004, eleven months after the invasion, an Oxford Research Inter- 
national poll found that a majority of Iraqis wanted a secular government: 
only 2 1 percent of respondents said their favored political system was "an Is- 
lamic state," and only 14 percent ranked "religious politicians" as their pre- 
ferred political actors. Six months later, with the occupation in a new and 
more violent phase, another poll found that 70 percent of Iraqis wanted Is- 
lamic law as the basis of the state. 25 As for sectarian violence, it was virtually 
unknown for the first year of the occupation. The first major incident, the 
bombing of Shia mosques during the holiday of Ashoura, was in March 
2004, a full year after the invasion. There can be no doubt that the occupa- 
tion deepened and ignited these hatreds. 


In fact, all the forces tearing Iraq apart today— rampant corruption, fero- 
cious sectarianism, the surge in religious fundamentalism and the tyranny of 
death squads— escalated in lockstep with the implementation of Bush's anti- 
Marshall Plan. After the toppling of Saddam Hussein, Iraq badly needed and 
deserved to be repaired and reunited, a process that could only have been 
led by Iraqis. Instead, at precisely that precarious moment, the country was 
transformed into a cutthroat capitalist laboratory— a system that pitted indi- 
viduals and communities against each other, that eliminated hundreds of 
thousands of jobs and livelihoods and that replaced the quest for justice with 
rampant impunity for foreign occupiers. 

Iraq's current state of disaster cannot be reduced either to the incompetence 
and cronyism of the Bush White House or to the sectarianism or tribalism of 
Iraqis. It is a very capitalist disaster, a nightmare of unfettered greed unleashed 
in the wake of war. The "fiasco" of Iraq is one created by a careful and faithful 
application of unrestrained Chicago School ideology. What follows is an ini- 
tial (and not exhaustive) account of the links between the "civil war" and the 
corporatist project at the heart of the invasion. It is a process of ideology 
boomeranging on the people who unleashed it— ideological blowback. 

The most widely recognized case of blowback was provoked by Bremer's first 
major act, the firing of approximately 500,000 state workers, most of them 
soldiers, but also doctors, nurses, teachers and engineers. "De-Baathification," 
as it was called, was supposedly driven by a desire to clean out the govern- 
ment of Saddam loyalists. No doubt that was part of the motivation, but it 
does not explain the scale of the layoffs or how deeply they savaged the pub- 
lic sector as a whole, punishing workers who were not high-level officials. 

The purge resembled similar attacks on the public sector that have ac- 
companied shock therapy programs ever since Milton Friedman advised 
Pinochet to slash government spending by 25 percent. Bremer made no se- 
cret of his antipathy for Iraq's "Stalinist economy," as he described the coun- 
try's state-run companies and large ministries, and he had no appreciation 
for the specialized skills and the years of accumulated knowledge possessed 
by Iraq's engineers, doctors, electricians and road builders. 26 Bremer knew 
people would be upset about losing their jobs, but as his memoir makes 
clear, he did not consider how the sudden amputation of Iraq's professional 
class would make it impossible for the Iraqi state to function and therefore 
hinder his own work. That blindness had little to do with anti-Saddamism 


and everything to do with free-market fervor. Only someone deeply inclined 
to see government purely as a burden and public sector workers as dead 
wood could have made the choices Bremer did. 

That ideological blindness had three concrete effects: it damaged the pos- 
sibility of reconstruction by removing skilled people from their posts, it 
weakened the voice of secular Iraqis, and it fed the resistance with angry 
people. Dozens of senior U.S. military and intelligence officers have ac- 
knowledged that many of the 400,000 soldiers Bremer laid off went straight 
to the emerging resistance. As Marine Colonel Thomas Hammes put it, 
"Now you have a couple hundred thousand people who are armed — 
because they took their weapons home with them— who know how to use 
the weapons, who have no future, who have a reason to be angry at you." 27 

At the same time, Bremer's classic Chicago School decision to fling open 
the borders to unrestricted imports while allowing foreign companies to own 
100 percent of Iraqi assets infuriated Iraq's business class. Many responded by 
funding the resistance with what little revenue they had left. After covering the 
first year of the Iraqi resistance in the Sunni Triangle, the investigative reporter 
Patrick Graham wrote in Harpers that Iraqi businessmen "are outraged by the 
new foreign-investment laws, which allow foreign companies to buy up facto- 
ries for very little. Their revenues have collapsed, because the country has been 
flooded with foreign goods. . . . The violence, these businessmen realize, is 
their only competitive edge. It is simple business logic: the more problems 
there are in Iraq, the harder it is for outsiders to get involved." 28 

More ideological blowback came from the White House's determination 
to prevent future Iraqi governments from changing Bremer's economic 
laws— the same drive to "lock in" changes made in the wake of a crisis has 
been in effect since the first IMF-issued "structural adjustment" program. 
From Washington's perspective, there was no point in having the most en- 
lightened investment rules in the world if a sovereign Iraqi government 
could take power in a few months and rewrite them. Because most of Bre- 
mer's decrees were in a legal gray zone, the Bush administration solution was 
to draft a new constitution for Iraq, a goal it pursued with bloody-minded 
determination— first with an interim constitution that locked in Bremer's 
laws, and then with a permanent constitution that attempted (but failed) to 
do the same. 

Many legal experts were baffled by Washington's constitutional obses- 
sion. On the surface, there was no pressing need to write a new document 
from scratch — Iraq's 1970 constitution, ignored by Saddam, was perfectly 


serviceable, and the country had far more urgent needs. More important, 
the process of writing a constitution is among the most wrenching any na- 
tion can go through, even a nation at peace. It brings every tension, rivalry, 
prejudice and latent grievance to the surface. To foist that process— twice — 
on a country as divided and shattered as Iraq after Saddam greatly exacer- 
bated the possibility of civil strife. The social cleavages cracked open by the 
negotiations have in no way healed, and may yet result in the partition of the 

Like the lifting of all trade restrictions, Bremer's plan to privatize Iraq's 
two hundred state companies was regarded by many Iraqis as yet another 
U.S. act of war. Workers learned that in order to make the companies attrac- 
tive to foreign investors, as many as two-thirds of them would have to lose 
their jobs. At one of Iraq's large state firms — a compound of seven factories 
that produced cooking oil, soap, dishwashing liquid and other basics— I 
heard a story that brought into sharp relief how many new enemies had been 
created by the privatization announcement. 

On a tour of the factory complex in a Baghdad suburb, I met Mahmud, a 
confident twenty-five-year-old with a neat beard. He said that when he and 
his fellow workers heard about the plans to sell their workplace, six months 
into the U.S. occupation, they "were shocked. If the private sector buys our 
company, the first thing they would do is reduce the staff to make more 
money. And we will be forced into a very hard destiny, because the factory is 
our only way of living." Frightened by this prospect, a group of seventeen 
workers, including Mahmud, went to confront one of the managers in his of- 
fice. A fight broke out: one worker struck a manager and the manager's body- 
guard fired at the workers, who then turned on him. He spent a month in the 
hospital. A couple of months later, there was even more violence. The man- 
ager and his son were shot and badly injured on their way to work. At the end 
of our meeting, I asked Mahmud what would happen if the plant was sold 
despite their objections. "There are two choices," he said, smiling kindly. 
"Either we will set the factory on fire and let the flames devour it to the 
ground, or we will blow ourselves up inside it. But it will not be privatized." 
It was an early warning— one of many— that the Bush team had definitely 
overestimated its ability to shock Iraqis into submission. 

There was another obstacle to Washington's privatization dreams: the free- 
market fundamentalism that shaped the structure of the occupation itself. 
Thanks to their rejections of all things "statist," the occupation authority run- 
ning out of the Green Zone was far too understaffed and underresourced to 


pull off its own ambitious plans — especially in the face of the kind of hard- 
core resistance expressed by workers like Mahmud. As The Washington 
Post's Rajiv Chandrasekaran revealed, the CPA was such a skeletal organiza- 
tion that it had just three people assigned to the enormous task of privatizing 
Iraq's state-owned factories. "Don't bother starting/' the three lonely staffers 
were counseled by a delegation from East Germany— which, when it sold 
off its state assets, had assigned eight thousand people to the project. 29 In 
short, the CPA was itself too privatized to privatize Iraq. 

The problem wasn't just that the CPA was understaffed, it was also that it 
was staffed by people who lacked the baseline belief in the public sphere that 
is required for the complex task of reconstructing a state from the ground 
up. As the political scientist Michael Wolfe puts it, "Conservatives cannot 
govern well for the same reason that vegetarians cannot prepare a world-class 
boeuf bourguignon: If you believe that what you are called upon to do is 
wrong, you are unlikely to do it very well." He adds, "As a way of governing, 
conservatism is another name for disaster." 50 

It certainly was in Iraq. Much has been made of the youth and inexperi- 
ence of the U.S. political appointees in the CPA— the fact that a handful of 
twentysomething Republicans were given key roles overseeing Iraq's $13 bil- 
lion budget. 51 While there is no question that the members of the so-called 
brat pack were alarmingly young, that was not their greatest liability. These 
were not just any political cronies; they were frontline warriors from America s 
counterrevolution against all relics of Keynesianism, many of them linked to 
the Heritage Foundation, ground zero of Friedmanism since it was launched 
in 1973. So whether they were twenty-two-year-old Dick Cheney interns or six- 
tysomething university presidents, they shared a cultural antipathy to govern- 
ment and governing that, while invaluable for the dismantling of social 
security and the public education system back home, had little use when the 
job was actually to build up public institutions that had been destroyed. 

In fact, many seemed to believe that the process was unnecessary. James 
Haveman, in charge of rebuilding Iraq's health care system, was so ideologi- 
cally opposed to free, public health care that, in a country where 70 percent 
of child deaths are caused by treatable illnesses such as diarrhea, and incu- 
bators are held together with duct tape, he decided that an overarching pri- 
ority was to privatize the drug distribution system. 52 

The paucity of experienced civil servants in the Green Zone was not an 
oversight— it was an expression of the fact that the occupation of Iraq was, 
from the start, a radical experiment in hollow governance. By the time the 


think-tank lifers arrived in Baghdad, the crucial roles in the reconstruction 
had already all been outsourced to Halliburton and KPMG. Their job as the 
public servants was simply to administer the petty cash, which in Iraq took 
the form of handing shrink-wrapped bricks of hundred-dollar bills to con- 
tractors. It was a graphic glimpse into the acceptable role of government in a 
corporatist state— to act as conveyor belt for getting public money into pri- 
vate hands, a job for which ideological commitment is far more relevant 
than elaborate field experience. 

That nonstop conveyor belt was part of what was so enraging to Iraqis 
about the U.S. insistence that they adapt to a strict free market, without state 
subsidies or trade protections. In one of his many lectures to Iraqi business- 
people, Michael Fleischer explained that "protected businesses never, never 
become competitive." 33 He appeared to be impervious to the irony that Hal- 
liburton, Bechtel, Parsons, KPMG, RTI, Blackwater and all the other U.S. 
corporations that were in Iraq to take advantage of the reconstruction were 
part of a vast protectionist racket whereby the U.S. government had created 
their markets with war, barred their competitors from even entering the race, 
then paid them to do the work, while guaranteeing them a profit to boot— all 
at taxpayer expense. The Chicago School crusade, which emerged with the 
core purpose of dismantling the welfare statism of the New Deal, had finally 
reached its zenith in this corporate New Deal. It was a simpler, more 
stripped-down form of privatization— the transfer of bulky assets wasn't even 
necessary: just straight-up corporate gorging on state coffers. No investment, 
no accountability, astronomical profits. 

The double standards were explosive, as was the systematic exclusion of 
Iraqis from the plan. Having suffered through the sanctions and the inva- 
sion, most Iraqis naturally assumed that they had the right to benefit from the 
reconstruction of their country— not just from the final product but from the 
jobs created along the way. When tens of thousands of foreign workers 
poured across Iraq's borders to take up jobs with foreign contractors, it was 
seen as an extension of the invasion. Rather than reconstruction, this was de- 
struction in a different guise— the wholesale wiping out of the country's in- 
dustry, which had been a powerful source of national pride, one that cut 
across sectarian lines. Only fifteen thousand Iraqis were hired to work for the 
U.S.-funded reconstruction during Bremer's tenure, a staggeringly low fig- 
ure. 34 "When the Iraqi people see all these contracts going to foreigners and 
these people bring in their own security guards and all their own engineers, 
and we're just supposed to watch them, what do you expect?" Nouri Sitto, an 


Iraqi American, told me when we met in the Green Zone. Sitto had moved 
back to Baghdad to assist the CPA with the reconstruction, but he was tired 
of being diplomatic. "The economy is the number-one reason for the terror- 
ism and the lack of security." 

Much of the violence took direct aim at the foreign-run occupation, its 
projects and its workers. Some of the attacks clearly came from elements in 
Iraq, like al Qaeda, that are guided by a strategy of spreading chaos. However, 
if the reconstruction had been seen as part of a national project from the start, 
the general Iraqi population might have defended it as an extension of their 
communities, making the work of provocateurs far more difficult. 

The Bush administration could easily have stipulated that any company 
receiving U.S. tax dollars had to staff its projects with Iraqis. It could also 
have contracted for many jobs directly with Iraqi firms. Such simple, 
common-sense measures did not happen for years because they conflicted 
with the underlying strategy of turning Iraq into an emerging market eco- 
nomic bubble— and everyone knows that bubbles are not inflated with rules 
and regulations but by their absence. So, in the name of speed and effi- 
ciency, contractors could hire whomever they wished, import from wherever 
they liked and subcontract to whatever company they wanted. 

If within six months of the invasion, Iraqis had found themselves drinking 
clean water from Bechtel pipes, their homes illuminated by GE lights, their 
infirm treated in sanitary Parsons-built hospitals, their streets patrolled by com- 
petent DynCorp-trained police, many citizens (though not all) would proba- 
bly have overcome their anger at being excluded from the reconstruction 
process. But none of this happened, and well before Iraqi resistance forces be- 
gan systematically targeting reconstruction sites it was clear that applying 
laissez-faire principles to such a huge government task had been a disaster. 

Freed of all regulations, largely protected from criminal prosecution and 
on contracts that guaranteed their costs would be covered, plus a profit, many 
foreign corporations did something entirely predictable: they scammed 
wildly. Known in Iraq as "the primes," the big contractors engaged in elabo- 
rate subcontracting schemes. They set up offices in the Green Zone, or even 
Kuwait City and Amman, then subcontracted to Kuwaiti companies, who 
subcontracted to Saudis, who, when the security situation got too rough, fi- 
nally subcontracted to Iraqi firms, often from Kurdistan, for a fraction of what 
the contracts were worth. The Democratic senator Byron Dorgan described 
this web, using an air-conditioning contract in Baghdad as an example: "The 
contract goes to a subcontractor, which goes to another subcontractor, and a 


fourth-level subcontractor. And the payment for air-conditioning turns out to 
be payments to four contractors, the fourth of which puts a fan in a room. Yes, 
the American taxpayer paid for an air-conditioner and, after the money goes 
through four hands like ice cubes travel around the room, there is a fan put in 
a room in Iraq/' 35 More to the point, all this time Iraqis watched their aid 
money stolen as their country boiled. 

When Bechtel packed up and left Iraq in November 2006, it blamed "the 
overlay of violence" for its inability to fulfill its projects. But the contractor 
failure began well before the armed resistance in Iraq built up steam. The 
first schools that Bechtel reconstructed drew complaints immediately. 36 In 
early April 2004, before Iraq had spiraled into violence, I visited the Baghdad 
Central Children's Hospital. It had supposedly been rebuilt by a different 
U.S. contractor, but there was raw sewage in the hallways, none of the toilets 
worked and the men trying to fix the mess were so poor that they didn't have 
shoes— they were subsubsubcontractors, like the women who sew piecework 
at their kitchen tables for a Wal-Mart contractor's contractor's contractor. 

The mismanagement continued for three and a half years until all the 
major U.S. reconstruction contractors pulled out of Iraq, their billions spent, 
the bulk of the work still undone. Parsons was handed $186 million to build 
142 health clinics. Only 6 were ever completed. Even the projects held up 
as reconstruction success stories have been called into question. In April 
2007, U.S. inspectors in Iraq looked into eight projects completed by U.S. 
contractors— including a maternity hospital and a water purification system— 
and found that "seven were no longer operating as designed," according to The 
New York Times. The paper also reported that Iraq's power grid was producing 
significantly less electricity in 2007 than it did in 2006. 37 As of December 
2006, when all the main reconstruction contracts were ending, the Inspector 
General's Office was investigating eighty-seven cases of possible fraud relating 
to U.S. contractors in Iraq. 38 Corruption during the occupation was not the 
result of poor management but of a policy decision: if Iraq was to be the next 
frontier for Wild West capitalism, it needed to be liberated from laws." 

Bremer's CPA would not try to stop the various scams, side deals and shell 
games because the CPA was itself a shell game. Though it was billed as the 
U.S. occupation authority, it's unclear that it held that distinction in any- 
thing other than name. This point was forcefully made by a judge in the in- 
famous Custer Battles corruption case. 

T wo former employees of the security firm launched a whistle-blower 
lawsuit against the company, accusing it of cheating on reconstruction-related 


contracts with the CPA and defrauding the U.S. government of millions of dol- 
lars, mostly for work done at the Baghdad International Airport. The case was 
based on documents produced by the company that clearly showed it was keep- 
ing two sets of numbers— one for itself, one for invoicing the CPA. Retired 
Brigadier General Hugh Tant testified that the company's performance was 
"probably the worst I've ever seen in my 30 years in the army." (Among Custer 
Battles' many alleged violations, it is said to have appropriated Iraqi-owned fork- 
lifts from the airport, repainted them and billed the CPA for the cost of leasing 
the machines.) 39 

In March 2006, a federal jury in Virginia ruled against the company, find- 
ing it guilty of fraud, and forced it to pay $10 million in damages. The com- 
pany then asked the judge to overturn the verdict, with a revealing defense. It 
claimed that the CPA was not part of the U.S. government, and therefore not 
subject to its laws, including the False Claims Act. The implications of this 
defense were enormous: the Bush administration had indemnified U.S. cor- 
porations working in Iraq from any liability under Iraqi laws; if the CPA 
wasn't subject to U.S. law either, it meant that the contractors weren't subject 
to any law at all — U.S. or Iraqi. This time, the judge ruled in the company's 
favor: he said there was plenty of evidence that Custer Battles had submitted 
to the CPA "false and fraudulently inflated invoices," but he ruled that the 
plaintiffs had "failed to prove that the claims were presented to the United 
States." 40 In other words, the U.S. government presence in Iraq during the 
first year of its economic experiment had been a mirage — there had been no 
government, just a funnel to get U.S. taxpayer and Iraqi oil dollars to foreign 
corporations, completely outside the law. In this way, Iraq represented the 
most extreme expression of the anti-state counterrevolution— a hollow state, 
where, as the courts finally established, there was no there, there. 

After handing out its billions to contractors, the CPA melted away. Its for- 
mer staffers returned to the private sector and, when the scandals hit, there 
was no one left to defend the Green Zone's dismal record. But in Iraq, the 
missing billions were keenly felt. "The situation now is much worse and it 
seems not to be improving despite the huge contracts signed with American 
companies," remarked an engineer with the Ministry of Electricity the week 
after Bechtel announced its departure from Iraq. "It is strange how billions of 
dollars spent on electricity brought no improvement whatsoever, but in fact 
worsened the situation." A taxi driver in Mosul asked, "What reconstruction? 
Today we are drinking untreated water from a plant built decades ago that 
was never maintained. The electricity only visits us two hours a day. And 


now we are going backward. We cook on the firewood we gather from the 
forests because of the gas shortage." 41 

The catastrophic failure to reconstruct also shared direct responsibility for 
the most lethal form of blowback— the dangerous rise of religious funda- 
mentalism and sectarian conflict. When the occupation proved unable to 
provide the most basic services, including security, the mosques and local 
militias filled the vacuum. The young Shia cleric Moqtada al-Sadr proved 
particularly adept at exposing the failures of Bremer s privatized reconstruc- 
tion by running his own shadow reconstruction in Shia slums from Baghdad 
to Basra, earning himself a devoted following. Funded through donations to 
mosques, and perhaps later with help from Iran, the centers dispatched elec- 
tricians to fix power and phone lines, organized local garbage collection, set 
up emergency generators, ran blood drives and directed traffic. "I found a 
vacuum, and no one filled the vacuum," al-Sadr said in the early days of the 
occupation, adding, "What I can do, I do." 42 He also took the young men 
who saw no jobs and no hope in Bremer's Iraq, dressed them in black and 
armed them with rusty Kalashnikovs. The result was the Mahdi Army, now 
one of the most brutal forces in Iraqi's sectarian battles. These militias are 
corporatism's legacy too: if the reconstruction had provided jobs, security 
and services to Iraqis, al-Sadr would have been deprived of both his mission 
and many of his newfound followers. As it was, corporate America's failures 
laid the groundwork for al-Sadr's successes. 

Iraq under Bremer was the logical conclusion of Chicago School theory: a 
public sector reduced to a minimal number of employees, mostly contract 
workers, living in a Halliburton city state, tasked with signing corporate- 
friendly laws drafted by KPMG and handing out duffle bags of cash to West- 
ern contractors protected by mercenary soldiers, themselves shielded by full 
legal immunity. All around them were furious people, increasingly turning 
to religious fundamentalism because it's the only source of power in a 
hollowed-out state. Like Russia's gangsterism and Bush's cronyism, contem- 
porary Iraq is a creation of the fifty-year crusade to privatize the world. 
Rather than being disowned by its creators, it deserves to be seen as the 
purest incarnation yet of the ideology that gave it birth. 




Would it not be easier 

In that case for the government 

To dissolve the people 

And elect another? 

-Bertolt Brecht, "The Solution," 1953 1 

Iraq is the last great frontier in the Middle East. ... In Iraq, 80 per 
cent of the oil wells ever drilled have been discoveries. 

—David Horgan, chief executive of the Irish oil company Petrel, Jan- 
uary 2007 2 

Is it possible that the Bush administration was unaware that its economic 
program had the potential to spark a violent backlash in Iraq? One person 
likely to have been aware of possible negative consequences was the man 
who implemented the policies, Paul Bremer. In November 2001, shortly af- 
ter he had launched his new counter-terrorism company, Crisis Consulting 
Practice, Bremer wrote a policy paper for his clients explaining why multi- 
national corporations faced increased risks of terrorist attacks at home and 
abroad. In the paper, titled "New Risks in International Business," he told his 
elite clients that they faced increased dangers because of the economic 
model that had made them so wealthy. Free trade, he wrote, has led to "the 
creation of unprecedented wealth," but it has "immediate negative conse- 
quences for many." It "requires laying off workers. And opening markets to for- 
eign trade puts enormous pressure on traditional retailers and trade 


monopolies." All these changes lead to "growing income gaps and social ten- 
sions " which in turn can lead to a range of attacks on U.S. firms, including 
terrorist attacks. 3 

That certainly is what happened in Iraq. If the war's architects convinced 
themselves that there would be no political blowback from their economic 
program, it was probably not because they believed Iraqis would actively 
consent to such policies of systematic dispossession. Rather, the war planners 
were banking on something else— the disorientation of Iraqis, their collec- 
tive regression, their inability to keep up with the pace of transformation. 
They were banking, in other words, on the power of shock. The guiding as- 
sumption of Iraq's military and economic shock therapists, best articulated 
by the former deputy secretary of state Richard Armitage, was that Iraqis 
would be so stunned by U.S. firepower, and so relieved to be rid of Saddam, 
"that they could be easily marshaled from point A to point B." 4 Then, after a 
few months, they would emerge from their postwar daze, pleasantly sur- 
prised to be living in an Arabic Singapore, a "Tiger on the Tigris," as some 
market analysts were excitedly calling it. 

Instead, a great many Iraqis immediately demanded a say in the transfor- 
mation of their country. And it was the Bush administration's response to this 
unexpected turn of events that generated the most blowback of all. 

Dismantling Democracy 

In the summer after Iraq's invasion, there was so much pent-up hunger for 
political participation that Baghdad, for all its daily hardships, displayed an 
almost carnival-like atmosphere. There was anger at Bremer's layoffs, and 
frustration with the blackouts and the foreign contractors, but for months 
that anger was primarily expressed through outbursts of unregulated, exu- 
berant free speech. All summer there were daily protests outside the gates of 
the Green Zone, many by workers demanding their old jobs back. Hundreds 
of new newspapers flew off printing presses, filled with articles critical of 
Bremer and his economic program. Clerics preached politics during the Fri- 
day sermons, a freedom impossible under Saddam. 

Most exciting of all, there were spontaneous elections breaking out in 
cities, towns and provinces across the country. Finally free of Saddam's iron 
grip, neighbors were convening town hall meetings and electing leaders to 
represent them in this new era. In cities like Samarra, Hilla and Mosul, re- 
ligious leaders, secular professionals and tribespeople worked together to 


set local priorities for reconstruction, defying the worst predictions about 
sectarianism and fundamentalism. Meetings were heated, but by many ac- 
counts they were also joyous: the challenges were enormous but freedom 
was becoming a reality. In many cases, U.S. forces, believing their presi- 
dent when he said the army had been sent to Iraq to spread democracy, 
played a facilitating role, helping to organize the elections, even building 
ballot boxes. 

The democratic enthusiasm, combined with the clear rejection of Bre- 
mer's economic program, put the Bush administration in an extremely diffi- 
cult position. It had made bold promises to hand over power to an elected 
Iraqi government in a matter of months and to include Iraqis in decision 
making right away. But that first summer left no doubt that any relinquishing 
of power would mean abandoning the dream of turning Iraq into a model 
privatized economy dotted with sprawling U.S. military bases; economic na- 
tionalism was far too deeply ingrained in the populace, particularly when it 
came to the national oil reserves, the greatest prize of all. So Washington 
abandoned its democratic promises and instead ordered increases in the 
shock levels in the hope that a higher dosage would finally do the trick. It 
was a decision that brought the crusade for a pure free market back full cir- 
cle to its roots in the Southern Cone of Latin America, when economic 
shock therapy was enforced by brutally suppressing democracy and by disap- 
pearing and torturing anyone who stood in the way. 

When Paul Bremer first arrived, the U.S. plan was to convene a large con- 
stituent assembly, representing all sectors of Iraqi society, where delegates 
would vote for the members of an interim executive council. After spending 
two weeks in Baghdad, Bremer scrapped the idea. Instead, he decided to 
handpick the members of an Iraqi Governing Council. In a message to Pres- 
ident Bush, Bremer described his process for selecting the Iraqi members of 
the council as "a cross between blind man's bluff and three-dimensional tic- 
tac-toe." 5 

Bremer had said that the council would have governing power, but once 
again he changed his mind. "My experience with the Governing Council at 
this point suggested this would not be a great idea," the former envoy later 
said, explaining that the council members were too slow and deliberative— 
traits unsuitable for his shock therapy plans. "They couldn't organize a two- 
car parade," Bremer said. "They were simply not able to make decisions in a 
timely fashion, or any decisions. Moreover, I still felt very strongly about the 


importance of getting a constitution in place before we handed sovereignty 
to anybody." 6 

Bremer's next problem was the elections breaking out in towns and cities 
across the country. At the end of June, only his second month in Iraq, Bre- 
mer sent word that all local elections must stop immediately. The new plan 
was for Iraq's local leaders to be appointed by the occupation, just as the 
Governing Council had been. A defining showdown took place in Najaf, the 
holiest city for Iraq's Shia, the largest religious denomination in the country. 
Najaf was in the process of organizing citywide elections with the help of 
U.S. troops when, only one day before registration, the lieutenant colonel in 
charge got a call from Marine Major General Jim Mattis. "The election had 
to be canceled. Bremer was concerned that an unfriendly Islamic candidate 
would prevail. . . . Bremer would not allow the wrong guy to win the elec- 
tion. The Marines were advised to select a group of Iraqis they thought were 
safe and have them pick a mayor. That was how the United States would 
control the process," wrote Michael Gordon and General Bernard Trainor, 
the authors of Cobra II, regarded as the definitive military history of the in- 
vasion. In the end, the U.S. military appointed a Saddam-era army colonel as 
Najaf 's mayor, as they did in cities and towns across the country.* 7 

In some cases, Bremer's ban came after Iraqis had already voted in elec- 
tions for local representatives. Undaunted, Bremer ordered the creation of 
new councils. In the province of Taji, RTI, the Mormon-dominated contrac- 
tor tasked with building local government, dismantled the council that local 
people had elected months before it arrived and insisted on starting from 
scratch. "We feel we are going backwards," one man complained. Bremer 
insisted that there was "no blanket prohibition" against democracy. "I'm not 
opposed to it, but I want to do it a way that takes care of our concerns. . . . 
Elections that are held too early can be destructive. It's got to be done very 
carefully." 8 

At that point, Iraqis were still expecting Washington to make good on its 
promise to organize national elections and hand over power directly to a gov- 
ernment elected by the majority of citizens. But in November 2003, after he 
canceled local elections, Bremer flew back to Washington for huddled 
meetings at the White House. When he returned to Baghdad, he announced 

* This was one of the reasons why "de-Baathification" inspired such rage: while low-level 
soldiers had all lost their jobs, along with teachers and doctors who had been required to join 
the party in order to advance professionally, top-level Baathist military officials, well known 
for their human rights abuses, were being enlisted to bring order to the cities and towns. 


that general elections were off the table. Iraq's first "sovereign" government